By James Saft
(Reuters) – Punished by another year of bad performance from active investment managers, there is some encouraging evidence that investors are finally wising up.
Call it the triumph of experience over hope, or simply a case of slow but steady learning, but last year equity-trading volume slumped and the flow of funds into low-cost options like exchange-traded funds continued to gain momentum.
A record $188 billion poured into U.S. ETFs in 2012, according to IndexUniverse, taking assets under management in ETFs to $1.35 trillion. The vast majority of the money is in low-cost index-based vehicles. While that’s only about 12 percent of the $11.6 trillion industry, at least it represents a growing minority that is accepting the boring but rewarding reality that handsomely paid managers are not worth it because they are not going to consistently beat the market.
No two ways about it, the active management industry had a bad year, failing to keep pace with the S&P 500′s 16 percent gain and the broader Russell 2000′s 16.3 percent performance. Only 36 percent of funds outperformed their benchmark, down from 41 percent in 2011, according to an analysis by Goldman Sachs of $1.3 trillion in U.S. equity mutual funds. Just under half of large-cap growth funds beat their benchmark, while a pitiful 20 percent of large-cap value funds managed the trick.
And don’t kid yourself that only “dumb” retail money goes into mutual funds, and the big boys and girls find their alpha in hedge funds. As of the last week in December, 88 percent of hedge funds were lagging the S&P 500. The average hedge fund logged a return for the year of just 3.5 percent, according to the HFRX Global Hedge Fund Index, a good sight better than their nearly 9 percent loss in 2011 but hardly the kind of reward you want for paying the standard hedge fund charge of 2 percent in fees and 20 percent of the profits.