A Cornucopia of Losses: The US Equity Market Has Been Great for Taxable Indexers but Hard on Active Managers

June 1, 2017

Critics are quick to point out that active management is a sub-zero-sum game. The high fees active managers charge make after-fee active returns lower, on average, than after-fee returns to an exchange-traded fund (ETF) that tracks the market. This puts all active investors at a disadvantage.

Active equity investors in the US with concentrated “high conviction” portfolios face a second hurdle that is perhaps less obvious. It is an empirical fact that while the US equity market has enjoyed an upward trend for decades, stocks that declined in value have been abundant. This is illustrated in the chart below, which shows the annual return to the Russell 3000© Index (grey dots) along with the percentages of stocks in the Russell 3000 that appreciated in value (teal bars) and declined in value (navy bars) over the period 1998–2016. Even when the index return is positive, as it was in 1998 and 1999 when the Internet bubble was forming, the percentage of declining stocks can be greater than 50%.

Returns for the Russell 3000 Index from 1998 to 2016

A 2014 study by J.P. Morgan analyzes this phenomenon in more detail,1 highlighting the fact that the median stock in the Russell 3000 Index underperformed the market by a lifetime return of –54%. Further, two-thirds of the Russell 3000 constituents underperformed the index, and 40% had negative annual returns. An investor who was attempting to pick winners from the Russell 3000 universe was fighting the odds.

In his column on The BAM ALLIANCE, Larry Swedroe highlighted the J.P. Morgan study, emphasizing its negative implications for the return-risk tradeoff that investors in concentrated portfolios face.2 In contrast, the study has positive implications for a tax-loss harvesting investor, for whom a rising index that includes a large percentage of declining stocks is truly advantageous.

1 " The Agony and the Ecstasy: The Risks and Rewards of a Concentrated Stock Position" examines the empirical properties of constituents of the Russell 3000 relative to the index over the period 1980–2014.
2The Agony and the Ecstasy: Risks and Rewards of a Concentrated Stock Position (Part 4), The BAM ALLIANCE.

The Russell 3000® Index is an equity benchmark for US stock performance. It is a capitalization-weighted index covering the largest 3,000 publicly traded US stocks. The index represents approximately 98% of the total market capitalization of the US stock market.
Aperio’s strategies are not in any way connected to or sponsored, endorsed, sold, or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). All rights in the Russell indexes vest in the relevant LSE Group company. The LSE Group does not accept any liability whatsoever to any person arising out of the use of the strategies or the underlying data.


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