Active Mutual Fund Managers Still Can't Beat Indexes

Posted by: Lauren Young on April 20, 2009

To paraphrase Joan Baez, where have all the active managers gone?

During the five-year market cycle from 2004 to 2008, the S&P 500 outperformed 72% of actively managed large-cap funds, the S&P MidCap 400 outperformed 76% of mid-cap funds, and the S&P SmallCap 600 outperformed 86% of small-cap funds. (For small-company investors, that’s a huge difference!)

These results are similar to the five-year cycle from 1999 to 2003, according to Standard & Poor’s Index Services. (S&P, like BusinessWeek, is owned by McGraw-Hill.)

What about international funds? Among international stock funds, indices outperformed most actively managed non-U.S. equity funds during the past five years in all four categories studied, including emerging market funds. In fact, emerging markets funds failed to beat their benchmark nearly 90% of the time during the period. That’s surprising, given that fund companies bill the foreign markets as more research intensive, and, thus, worthy of higher expense ratios.

Finally, S&P’s benchmark indices also beat a majority of actively managed fixed-income funds in all categories during the five-year horizon. The magnitude of underperformance ranges from 2% to 3% per year for municipal bond funds to 1% to 5% per year for investment-grade bond funds.

To put it simply, active funds failed to beat major indexes in every fund category.

Score one for Jack Bogle. (For more investing advice from Bogle, check out this BusinessWeek story.)

How have your actively managed funds performed lately? Which funds have delivered, and which ones have not? Indexers: let us know what you think, too.

Reader Comments

Bull Rub

April 20, 2009 4:08 PM

I saw the Bogle interview, and he doesn't see alot of future in fund managers,as Indexes beat every manager. On top of that investors save themselves alot of money in fees.

Bob

April 20, 2009 5:43 PM

Bogle can't compare with the Monetta Young Investor Fund(MYIFX). The fund significantly outperforming the index and most active fund managers. This year alone exceeding the index by 11.20%!!!!!!
Half the fund is indexed..half invested in best of breed companies.

My top fund choice.

jim

April 21, 2009 8:40 AM

Clearly indexes reign supreme and this doesn't even address the extra costs associated with active funds.

Take a look at the recent returns of RSP and RWL, both index ETFs that rebalance the S&P 500 by another metric (equal-weight and revenue).

tim

April 21, 2009 10:20 PM

Scott Burns has been saying this for years and the street has villified him. Those who listened to him outperformed the pros and saved the fees through his couch potato portfolio.

As for myself, with a PhD and an MBA I find it nearly impossible to find any reason why pros are regularly outperformed by indexes except for two reasons: incompetence and corruption. Loading up on stocks that benefit them more than their investors and churning.

tim

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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