In my first three articles in this series on whether passive versus active strategies perform better by mutual fund categories , we hit on the broad U.S. Large-Cap arena—Blend, Growth and Value. All three provided some interesting findings on the hugely debated subject matter relative to the institutional investment space. In this article, we're going to round out the U.S. core equity investing space by analyzing both the Mid-Cap Blend and Small-Cap Blend.
Again—keep in mind, I'm using Morningstar Direct as my source of screening, testing and research on return/expense data points.
So how does the U.S. Mid-Cap Blend space fare in the debate? My points of fund screening include the following:
- Morningstar Category : Mid-Cap Blend
- Equity/Style Box (Long): Mid-Cap Blend
- Investment Area: United States
- Fund Inception Date: Earlier than Dec. 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 screening results of the data search provided a total of 12 mutual funds—a very limited amount in the institutional category above, which surprised me quite a bit. My further screening below indicates that of those 12 funds, only three were index funds, and only one was an enhanced index fund, leaving eight actively managed funds.
- Indexed Funds: Yes or No
- Enhanced Indexed Fund: Yes or No
- Total Return Annualized five years trailing (month end April 30, 2015)
- Total Return Annualized 10 years trailing (month end April 30, 2015)
- Total Return Annualized 15 years trailing (month end April 30, 2015)
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, 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; therefore, I think we can assume the 5-, 10- and 15-year returns analyzed to be true total net returns.
The following table examines how well the passive versus active funds argument pans out for the Institutional U.S. Mid-Cap Blend space:
| MID-CAP BLEND | 5-Year Returns | 10-Year Returns | 15-Year Returns |
| No. of Index Funds in Top 5 funds of Return | Three total, including one as enhanced index | Three total, with none as enhanced index | One total, with none as enhanced index |
| No. of Index Funds in Top 10 funds of Return | Four total, including one as enhanced index | Four total, including one as enhanced index | Four total, including one as enhanced index |
| Highest Annualized Returning Fund | 14.959% | 10.266% | 11.742% |
| Highest Annualized Return (Index Fund) | 14.069% = Second | 10.266% = First | 8.982% = Fifth |
| Highest Annualized Return (Active Fund) | 14.959% = First | 10.023% =Fourth | 11.742% = First |
So with Mid-Cap Blend above, how does the U.S. Small-Cap Blend space fare in the debate? My points of fund screening include the following:
- Morningstar Category: Small-Cap Blend
- Equity/Style Box (Long): Small-Cap Blend
- Investment Area: United States
- Fund Inception Date: Earlier than Dec. 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 29 mutual funds. My further screening below indicates that of those 29, only three were index funds and one was an enhanced index fund, leaving 25 actively managed funds.
- Indexed Funds: Yes or No
- Enhanced Indexed Fund: Yes or No
- Total Return Annualized five years trailing (month end April 30, 2015)
- Total Return Annualized 10 years trailing (month end April 30, 2015)
- Total Return Annualized 15 years trailing (month end April 30, 2015)
The following chart examines how well the passive versus active funds argument pans out for the Institutional U.S. Small-Cap Blend space:
