AssetPreserver News

As we espouse all year long, index funds beat most managers over the long term.

Investors in actively managed mutual funds the last five years have reason to wonder what they’ve been paying for: A new study from Standard & Poors finds that 70% of large-cap fund managers who use the S&P 500 as a benchmark for comparison have failed to match the performance of the index over that time.

The time period covered in the latest report is year 2004 to 2008. The study does its best to make relevant comparisons by taking into account things such as survivorship bias, data cleaning, and style consistency to name a few. A listing of the study’s attributes are found in the link (in Resources).

The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and emerging-markets funds. What’s more, those numbers are similar to the previous five-year cycle.

Though some managers beat the indexes sometimes it is important to understand the risks and to know your odds of beating the index.

Things were even worse for small-cap active managers, said Dash. The S&P SmallCap 600 outperformed 85.5% of small-cap funds. That index was down 0.6% over the five years to Dec. 31.

Even among emerging-markets funds, for many years the darlings of mutual fund investors, most lagged their comparable S&P index. The S&P/IFC Emerging Markets Index bested 89.8% of actively managed emerging-markets stock funds in the past five years.

Actively managed bond funds also struggled. Except for high-yield funds, at least 80% of bond funds lagged their comparable benchmarks across all categories. Because of liquidity issues, bond benchmarks are not as easy to replicate by index funds. Fund cost is even more of a factor in the bond world.

Even better, the numbers from S&P are supported by research from Morningstar Inc.

Resources

S&P Studies – Standard & Poor’s Index Versus Active (SPIVA)