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Active Mutual Fund Managers Still Can't Beat Indexes


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.


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