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)

Why DO bond mutual funds vary in price?

Individual Bonds

Individual bonds, when held to maturity, give you the principal, not necessarily the purchase price, back plus interest. Typically, a bond is initially sold for $1,000 which is the principal amount. Existing bonds can be purchased through brokers in the secondary market. The purchase price of these bonds can be higher or lower than the principal amount. If you priced an individual bond every day as to what it would sell for, most likely it will vary from its issue price, but you will get your principal back at maturity date (or call date, if that occurs) as long as the company does not go bankrupt.

Bond Funds

Bond funds do not have a maturity date. The portfolio is priced every day, after market close, to see how much it is worth if it sold all its holdings. Depending on the risk of the bonds bought, the price of the bond fund can vary quite a bit (measured by standard deviation). Short-term bond funds will vary much less than long-term bond funds.

To give you a feel for standard deviation, a short-term bond fund such as VFSTX (Vanguard short-term investment grade fund) has a SD about 3. FAGIX (Fidelity’s Capital & Income fund), a junk bond fund, has a SD around12.

Standard deviation and monthly prices can be found on finance.yahoo.com under risk and historical prices.

The riskier the bond fund the higher the standard deviation and the more the prices vary.

Are you worried if your bank, credit union, or thrift is safe? See how your bank, thrift, or credit union rates with Bankrate.

Each entity is ranked by Bankrate’s proprietary Safe & Sound system based on financial strength and stability. 22 tests are applied to a financial institution to measure:

• Capital adequacy
• Asset quality
• Profitability
• Liquidity

An institution is rated from 5 stars (superior) to 1 star (lowest rating). Along with the star rating, a memo, and financial statement are available.

The memo includes institutiona highlights which shows information such as loan amounts, deposits, and profitibility. Early warning signs, if any, are included so you can keep an eye on.

The financial statement has a summary of important measurements such as net income, earnings,  assets, liquidity, and asset quality.

Though not an exclusive piece of information to make a banking decision on, it is very helpful to see where your bank rates. Note that these rankings are updated quarterly.

Another check is the one to the FDIC in which you can tell if your bank is FDIC insured. You can learn how deposit insurance works, find out whether your bank is FDIC insured, and other important tasks.