When The Very Best Fail, Should You Be Trying?

by: Larry Swedroe


Russell Investments and SEI are two powerhouses in the active management world. Collectively, the assets under advisement or management are well into 10 figures.

The boasts of these two companies is not supported by their investment results; rather, it seems to be just marketing hype.

The actively managed funds of Russell and SEI lose each time to Dimensional, and in almost every single asset class.

Recently, I received an email from Russell Investments announcing that they had terminated several money managers and hired new ones. The funds that had changes in management were the Russell Emerging Markets Fund, the Russell International Developed Markets Fund, the Russell Global Infrastructure Fund, and the Russell Tax-Managed Mid- and Small-Cap Fund.

Russell is one of the leading firms providing consultant services to pension plans and other institutional investors, helping them to identify the money managers that can outperform appropriate benchmarks. As such, their main role is to perform due diligence in interviewing, screening, and ultimately selecting the very best of the best. You can be sure that their consultants have thought of every conceivable screen to find the best fund managers. Surely, they have considered not only performance records, but also such factors as management tenure, depth of staff, consistency of performance (to make sure that a long-term record is not the result of one or two lucky years), performance in bear markets, consistency of implementation of strategy, turnover, costs, and so on.

It's unlikely that there's something that you or your financial advisor would think of that they hadn't already considered. Yet, despite their diligent efforts Russell was firing several managers. Which raises the obvious question: What did they do differently in identifying the replacements so that they don't repeat the mistakes they made in the past which resulted in the terminations?

I've asked this question many times of individuals, pension plans, endowments and retirement plan sponsors, and never once have I gotten an answer. Which brings forth my response: Well, if you haven't done anything different, why do you think you'll get a different outcome? Isn't repeating the same process and expecting a different outcome what Einstein supposedly called the definition of insanity?

That email reminded me that it's time to update the performance of two of the leading firms in this space, Russell Investments and SEI Inc., something I've been doing fairly regularly for a while. With that in mind, we'll begin with a quick look at their websites.

Russell's site states:

When you work with Russell, you'll be collaborating with a global leader in money manager research. Our process uses quantitative and qualitative methods to choose the managers we think are the best worldwide. From a global pool of 14,555 money manager products that we scrutinize, only 389 are selected for specific assignments. All managers chosen are continually monitored for quality and performance, and are replaced or reassigned whenever necessary.

SEI's site states:

The sound design behind our investment strategies helps you navigate sudden twists and turns, guiding clients in the direction of their ultimate financial destinations. These strategies are the product of SEI's tested investment philosophy developed through 40 years of innovation. ... We believe utilizing specialist money managers helps to produce more consistent results than generalists who drift from one style to another. We believe that identifying, hiring and managing specialist money managers helps to deliver more consistent performance. We call this process 'managing the managers.'

In addition to providing investment consulting to pension plans and other institutional investors, both firms also provide advice on selecting the best active managers to investment advisors. And they have their own family of actively managed funds. Many financial advisors use their funds. Collectively, the assets under advisement or management are well into 10 figures. Obviously, people believe that Russell and SEI must be able to identify the future alpha generates. The question is: Is that belief justified? Are their boasts supported by their investment results, or are they just marketing hype?

As mentioned above, for several years now I have been reporting on the results of their efforts. Each year we add one more year's performance. Each time I've run the data, the results have been virtually the same -- the actively managed funds of SEI and Russell lose each time, and in almost every single asset class. Now that's pretty hard to do, even if you set out to do it (unless you simply churn accounts). Yet, SEI and Russell have managed this feat.

The following table presents the results over the period for which we have data for all of the funds, the last 14 years (2000-13). Where more than one version of a fund is available, the lowest cost version is used. As you can see, the actively managed funds of SEI and Russell underperformed the passively managed "structured portfolios" of Dimensional Fund Advisors in all but one single case. (Full disclosure: My firm Buckingham recommends Dimensional funds in constructing client portfolios.) It didn't matter whether the asset class was large caps or the supposedly inefficient classes of small caps and emerging markets.


Annualized Return 2000-13 (%)

U.S. Large

SEI Institutional Managed Large Cap Growth A


Russell U.S. Core Equity I


DFA U.S. Large Company Portfolio


U.S. Small

SEI Institutional Managed Small Cap Growth A


Russell U.S. Small Cap Equity I


DFA U.S. Micro-Cap Portfolio Class


U.S. Large Value

SEI Institutional Managed Large Cap Value A


DFA U.S. Large Cap Value Portfolio III


U.S. Small Value

SEI Institutional Managed Small Cap Value A


DFA U.S. Small Cap Value Portfolio Class I


Emerging Markets

SEI Institutional International Trust Emerging Markets Equity A


Russell Emerging Markets S


DFA Emerging Markets Portfolio Class I


DFA Emerging Markets Small Cap Portfolio Class I


DFA Emerging Markets Value Portfolio Class I



SEI Institutional International Trust International Equity I


Russell International Developed Markets I


DFA Large Cap International Portfolio Class I


DFA International Value Portfolio III


DFA International Small Company Portfolio Class I


DFA International Small Cap Value Portfolio Class I



Using the DFA Large Cap International fund for that asset class and the DFA Emerging Markets Portfolio for that asset class (the DFA funds with the lowest return for the period), an equal weighted portfolio of six DFA funds would have returned 7.6 percent. A similar SEI portfolio would have returned just 4.2 percent. That's an underperformance of 3.4 percent a year.

Russell vs. DFA

Russell only has funds in four of the asset classes. An equal weighted portfolio of their funds would have returned 5.3 percent, underperforming by 1 percent a year an equal weighted portfolio of DFA funds that would have returned 6.3 percent.

It is important to note that the underperformance of both fund families is well beyond the difference in their expense ratios, demonstrating that the cost of active management goes well beyond just the visible expense ratios of the funds.

Given the considerable resources that these fund families have at their disposal, the evidence demonstrates just how difficult it is for active managers to generate alpha. If these firms cannot do it, what are the odds that you or your advisor can? This type evidence is why active management is called the loser's game. It's not that you cannot win. It's that the odds of winning are so low that it's not prudent to try.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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