What's Behind Your Fund Returns?
Beta may be boring, but it provides the majority of funds' returns.
During the past two decades, the share of passively managed equity fund assets has risen. While some lament that passive investors have consigned themselves to merely average returns, the truth is that the market average has been pretty good. The excess return on U.S. stocks has been about 6.1% annualized since 1926. The market return is the baseline upon which we can judge the performance of any U.S.-stock fund. In fact, most of the movement of our funds can be explained by exposure to a broad market index, otherwise known as market beta. Any return that an active portfolio manager can deliver in excess of the return from beta is alpha.
For most funds, beta is the largest source of return. The expectation for return beyond that which can be obtained cheaply through beta could justify the higher fees that active managers charge. But from January 2011 through December 2014, beta sources provided 104% of the return to the average active U.S. equity fund. Even among the 39% of the active fund share classes that managed to produce non-negative alpha, beta sources contributed 89% of the return.
Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.