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Active Mutual Funds Becoming Less “Active”

Active mutual fund managers are becoming less “active,” according to research reported in an IndexUniverse article.  The article states:

“Since 1991, the average correlation for actively managed mutual funds has been increasing. As of December 2011, it was at its approximate highest level in history, with the average fund having a correlation of 0.982 to its respective category index. Viewed differently, a correlation of 0.982 means that 98.2 percent of the return of a given active manager can be described entirely by the underlying benchmark index. This suggests the active manager is only adding roughly one-thirtieth of the total deviation in returns, but in many cases charging 10 times or more than what a comparable passive strategy costs.”

The research also found that there has also been a clear trend of a decreasing level of tracking error over time.  The study used data from Morningstar Direct on domestic equity mutual funds performance from January 1991 to December 2011.

 
 
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