Jeff Tjornehoj, head of Lipper Americas Research, said investors will have to decide if they have the stomach to stick with active funds in hopes of better results in the future.
A year like this sorts out what kind of investor you are, he said.
Even long-time standout managers like Bill Nygren of the $17.8 billion Oakmark Fund and Jason Subotky of the $14.2 billion Yacktman Fund are lagging, at a time when advisers are growing more focused on fees.
The Oakmark fund, which is up 11.82 percent this year through Nov. 25, charges 0.95 percent of assets in annual fees, compared with 0.09 percent for the SPDR S&P 500 exchange-traded fund, which mimics the S&P 500 and is up almost 14 percent this year, according to Morningstar.
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The Yacktman fund is up 10.2 percent over the same period and charges 0.74 percent of assets in annual fees.
The pay-for-active-performance camp argues that talented managers are worth paying for and will beat the market over investment cycles.
Rob Brown, chief investment strategist for United Capital, which has $11 billion under management and keeps about two thirds of its mutual fund holdings in active funds, estimates that good managers can add an extra 1 percent to returns over time compared with an index-only strategy.
Indeed, the top active managers have delivered. For example, $10,000 invested in the Yacktman Fund on Nov. 23, 2004, would have been worth $27,844 on Nov. 25 of this year; the same amount invested in the S&P 500 would be worth $21,649, according to Lipper.
Even so, active funds as a group tend to lag broad market indexes, though this year's underperformance is extreme. In the rout of 2008, when the S&P 500 fell 38 percent, more than half of the active large cap stock funds had declines that were greater than those of their benchmarks, Lipper found. The last time when more than half of active large cap stock managers beat their index was 2009, when the S&P 500 was up 26 percent. That year, 55 percent of these managers beat their benchmarks.
Unusually bad bets
In 2014, some recurring bad market bets were made by various active managers. Holding too much cash was one.
Yacktman's Subotky said high stock prices made him skeptical of buying new shares, leaving him with 17 percent of the fund's holdings in cash while share prices have continued to rise. He cautioned investors to have patience.
"Our goal is never to capture every last drop of a roaring bull market," Subotky said