- 76% of MarketGrader’s Core US Indexes ranked in the top 25% of their active manager peer group in 2024
- 62% of our Core US Indexes rank in the top 5% of active managers in the last 5 years
- The market cap weighted version of the Barron’s 400 Index (B400X), live since 2007, ranked in the top 6% among 1,911 active managers in Morningstar’s All Cap US Equity Category
We reported recently on the stellar performance of the MarketGrader Indexes in 2024, when a majority of them beat their passive benchmarks.
However, many investors don’t follow the benchmark, with almost 50% of all assets in global equity funds still invested in actively managed funds[1]. And given that our index methodology centers on stock selection driven by fundamentals, we (and our clients) find it especially useful to compare the performance of the MarketGrader Indexes to active fund managers.
Indeed, a picture of the true “opportunity cost” of investors’ capital allocation decisions is incomplete if it does not include a measure of how their investment performed relative to the pool of all investment opportunities available to them, which should include the performance of all actively managed mutual funds in their relevant asset categories. Therefore, we compared the 2024 performance of each of our indexes against their relevant peer group selected from the Morningstar mutual fund universe[2].
How did our proprietary GARP + Quality brand of smart beta do? We’re pleased to say our rules-based passively managed MarketGrader Indexes delivered exceptional returns when compared to their respective peer group of actively managed funds. Their performance looks even better when looking at 3- and 5-year returns, as our selection process shines brightest when the fundamental story underlying our index constituents is given time to play out.
For 2024, when comparing the performance of our 47 US equity strategies to their peers in the Morningstar universe:
- 36 finished in the top 50%, meaning they outperformed more than 50% of the managers in their peer group.
- 25 finished in the top 25%, meaning they outperformed more than 75% of the managers in their peer group, and
- 11 finished in the top 10%, meaning they outperformed more than 90% of the managers in their peer group.
When the performance window is increased to three years, the outperformance of our MarketGrader US equity strategies is even better:
- 44 of our 47 strategies outperformed more than 50% of the managers in their peer group (meaning only three strategies’ performance was in the bottom half of their peer group),
- 34 of our 47 strategies outperformed more than 75% of the managers in their peer group,
- and a staggering 30 of our 47 indexes outperformed more than 90% of the managers in their peer group.
And if the performance window is extended to five years, then:
- 42 MarketGrader US equity investment strategies outperformed more than 50% of the managers in their peer group,
- 36 strategies outperformed more than 75% of the managers in their peer group, and
- 26 strategies outperformed more than 90% of the managers in their peer group.
The consistency in the performance of the MarketGrader US equity strategies over 1-, 3- and 5-year periods demonstrates the merits of our rules-based approach to indexing built on fundamental stock selection, and the persistence of alpha in our indexes makes them an attractive alternative to actively managed funds, for whom consistent outperformance is famously elusive.[3]
Notable Outperformers
- The market cap weighted version of the Barron’s 400 Index—perhaps MarketGrader’s best known index, which was built in collaboration with Dow Jones Indexes and Barron’s in 2006— finished in the 6th percentile for 2024, among 1,911 active managers in the Morningstar All Cap universe, and slightly better over both the 3- and 5-year windows.
- The MarketGrader US Large Cap Core Index (MCW) landed in the 5th percentile in 2024 (among 990 managers), 3rd percentile over 3-years and 4th percentile over 5-years.
- While the market cap weighted version of the MarketGrader US Mid Cap 100 Index slightly outdid its equal weighted sibling in 2024, 17th percentile to 21st in the US Mid Cap Core category (394 managers), they tied over 3- and 5-yrs (7th percentile and 5th, respectively).
- Small Caps were another area of success in 2024, as MarketGrader’s four small cap indexes clustered around the top quartile in 2024 (out of 524 small cap managers), whereas nearly all indexes are in the top 5th percentile over both 3- and 5-years.
While these Core domestic exposures put up great results, MarketGrader’s more concentrated indexes within those same size segments, namely our six US Core Select Indexes, which feature 50 or 30 constituents, saw even better performance over 2024 than their broader cousins (and similarly impressive mid-term results vs. active peers).
US Large Cap Value has been another source of consistent outperformance in recent years for us. The MarketGrader US Large Cap Value Index finished the year in the 5th percentile (out of 316 managers), and ranks in the 2nd percentile over the 3- and 5-year windows. For investors concerned about increasingly stretched US equity valuations, our US Large Cap Value Index offers an attractive way to remain exposed to the US market without overpaying for growth.
MarketGrader’s performance among US Sectors, as measured by our family of concentrated indexes, offered a mixed bag in 2024, with notable differences depending on weighting scheme. Yet over 3- and 5-year windows, many MarketGrader Sector Indexes that were below the median in 2024—such as Consumer Discretionary, Energy, and Industrials—have top decile rankings. And the MarketGrader US Health Care Index leads its sector category, besting all active funds in the 5-yr window.
Investors, advisors and asset managers looking to systematically identify high quality growth companies with the highest likelihood of creating long-term shareholder value should consider our lineup of smart beta indexes, which straddle the gap between active and passive investing through rules-based stock selection based on GARP.
Note: We’ll summarize our performance relative to actively managed funds for our equity exposures outside the US in our next post. Meanwhile, investors interested in a complete rundown of our indexes’ performance against active managers may download our MarketGrader vs. Active Managers Report Card.
[1] Global passive equity funds’ assets eclipsed active in 2023 for the first time. Reuters, February 1, 2024.
[2] Performance for all actively managed funds was gross of fees, providing a fair comparison against MarketGrader Indexes, which do not have management fees or trading costs. Source: Morningstar Direct.
[3] To quote S&P Global’s SPIVA U.S. Persistence Scorecard for 2023, “Among top-quartile funds within all reported active domestic equity categories as of December 2019, not a single fund remained in the top quartile over the next four years.”