I hope everyone enjoyed my first article in the series—Who Wins 'Passive vs. Active' Institutional Debate? Pt. 1: U.S. Large Cap Blend—on this highly debated subject matter. However, before we dive into the Large Cap Growth space analysis, let me respond to a few comments relative to my first article.
These articles are derived from a simple database screening, with the goal of creating a pure 'apples to apples' comparison between the institutional-only active vs. index mutual fund space. Fund survivorship is a reasonable concern; however, for me to include non-survivorship, it would also be necessary to include all fund start-ups for the trailing five- and 10-year return ranges. Furthermore, survivorship of a fund could have more characteristics such as fund company marketing issues, fund company investment category change, or just a simple inconsistent style box drift, excluding it from the screening, etc.
Therefore, in my opinion, those approachess—while valid—take us down a road of continuously comparing apples with oranges. Same thing with tax efficiency, as that issue really is a secondary concern, depending on whether the investable assets are qualified versus non-qualified. Also, as far as the turnover-related questions, those are moot, as the Morningstar net return numbers are defined/derived from the funds' NAV, which should include all expenses of turnover.
Lastly, I'd urge readers to look at the data objectively, rather than from a biased view, as all investments—regardless of active or index—are not created equal.
Therefore, as in my first article, I've chosen to make the comparison a more structured screening (just as any investment analysis or professionally managed account should be handled within the advisory world).
Keep in mind that I'm using Morningstar Direct as my source of screening, testing and research on return/expense data points.
This time, we're looking at the U.S. Large Cap Growth space. My points of fund screening include the following:
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- Morningstar Category = Large Growth
- Equity/Style Box (Long) = Large Growth
- Investment Area = United States of America
- Fund Inception Date = < 12/31/1999 (For a true picture of a 15-year return period comparison, as anything shorter than 10 years, I believe, can easily be misinterpreted.)
- Fund Share Class = Institutional Only
The results of the data search provided a total of 68 mutual funds. My data-points screening below indicates that of those 68 funds, only one was an Index Fund, and none were Enhanced Index Funds, leaving 67 actively managed funds:
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- Indexed Funds = Yes or No
- Enhanced Indexed Fund = Yes or No
- Total Return Annualized 5 years trailing (Month End 4/30/15)
- Total Return Annualized 10 years trailing (Month End 4/30/15)
- Total Return Annualized 15 years trailing (Month End 4/30/15)
Again, to clarify, I think it's important to define one data point used above. Morningstar defines its Total Return Annualized as a return, net of any management, administrative and 12b-1 fees and other costs taken out of the fund's assets, and doesn't include sales loads or redemption fees. Of course, institutional share class funds generally have no sales loads, so I think we can assume the 5-, 10- and 15-year returns analyzed to be a true total NET return.
