In this report, we examine the impact of fees on performance for both retail mutual funds and institutional managed accounts, using gross-of-fees returns.
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Our findings show that within domestic equity, the majority of managers in nearly every category underperformed their respective benchmarks over the five-year horizon, for both retail funds and institutional accounts.
- Over 76.23% of mutual fund managers and 85.81% of institutional accounts in the large-cap equity space underperformed the S&P 500®.
- Similarly, in the mid-cap space, 65.81% of mutual funds and 64.71% of institutional accounts underperformed the S&P MidCap 400®.
- In the small-cap space, over 80% of managers on both fronts underperformed the S&P SmallCap 600®. The findings in the small-cap space dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management.
- Managers investing in international equities and international small-cap equities fared better than their benchmarks when measured using gross-of-fees returns. The findings are consistent for mutual funds and institutional accounts.
- In fixed income, the findings were mixed depending on the market segment. Institutional managers showed strength in U.S. spread products such as mortgage-backed securities (MBSs), investment-grade corporate bonds, and leveraged loans, outperforming their respective benchmarks.
- The municipal bond market was the only space in which we saw a significant performance divergence between institutional accounts and mutual funds directionally.
- Real estate investment trusts (REITs) is the only category in which active management outperformed the benchmark, on both retail and institutional fronts.
- In emerging market debt, managers showed better performance in the U.S.-denominated corporate debt space. However, few managers were able to beat the benchmark in the local currency space, possibly indicating the challenge of actively managing emerging market currency exposure.
Undeniably, fees play a major role in the active versus passive debate. After subtracting fees, returns from active management tend to be less than those from passive management, as the latter costs less.
- Within active management, it is widely understood and has been documented that fees can vary meaningfully depending on the type of investor.
- In general, retail investors tend to pay higher advisory and management fees than institutional investors. Institutional investors have the option to negotiate fees directly with asset managers based on the size of a mandate and how many strategies may already exist with one manager. Retail investors, on the other hand, lack such bargaining power.