Despite consistent stock market highs this year, most large-cap fund managers in the U.S. have been unable to match the returns of the - and now it seems Australian fund managers are facing the same fate.
Over five years, the majority of actively managed Australian equity funds in most categories failed to beat their comparable benchmark indices as of the end of June, according to data from S&P Dow Jones Indices.
Some 75 percent of Australian large-cap equity funds have underperformed Australia's main index the over the last five years and over three years, 66 percent of funds failed to match the returns of the market.
Equity funds were not the only culprit, with 80 percent of bond funds also underperforming the S&P/ASX Australian Fixed Interest Index.
The figures are similar to those released by S&P Capital IQ Fund Research in August on U.S. funds, which showed about 80 percent of large-cap mutual funds underperformed the S&P 500, which most analysts put down to a persistent lack of volatility in markets.
The active management industry has come under fire over high fees, especially when managers underperform the broader market, as fees for passive strategies which track an index such as exchange traded funds (ETFs), are much lower and the holdings are very easy to buy and sell.
Popularity in ETFs has boomed so far this year, with U.S. funds seeing $121.4 billion of new capital flow in so far this year and $48.1 billion for the third quarter to 27 September 2014, according to data from ETF data group XTF.
U.S. mutual funds have seen inflows of $50 billion so far in 2014, according to chief market strategist at ConvergEx Group, Nicholas Colas, who cited the Investment Company Institute.
"The last five years have been a boon to passive investing – why buy the active manager cow when you can get the milk of high returns for (almost) free? The recent news that the California Public Employees Retirement System plans to scale back their exposure to hedge funds is just one touchstone in that trend," Colas said.
"Price volatility will allow active managers to feel some sunlight after the long eclipse of the last half decade. Truly skillful managers – long only or hedge fund, it matters not – welcome volatility since it allows them to find the babies mixed in with the bathwater," he added.
But chief investment officer of investment firm Brandywine Global, David Hoffman said being tied to strict benchmarks is the problem, rather than active management, describing his firm as "index agnostic".
"Our definition of risk is losing our clients' money rather than having a tracking error risk, which assumes that the benchmark is the right place to be. Active is how we make money for clients," he said speaking at an investment conference in New York.
"Brandywine has been index agnostic for 20 years," he said.