Indexing Vs. Active Management
Although it is difficult to predict the likelihood that actively managed mutual funds will outperform their benchmark index over any 12-36 month period, there is a high level of predictability that index investing will outperform actively managed funds when looking at any given 5-year period—as shown in the table below.
% of Actively Managed Funds Outperforming Their Index
|
Category |
Comparable Index |
6/2006—6/2011 |
6/2001—6/2006 |
|
LC Growth |
S&P 500 Growth |
20% |
46% |
|
LC Core |
S&P 500 |
37% |
30% |
|
LC Value |
S&P 500 Value |
65% |
13% |
|
MC Growth |
S&P MidCap 400 |
12% |
5% |
|
MC Core |
S&P MidCap 400 |
16% |
18% |
|
MC Value |
S&P MidCap 400 Value |
33% |
21% |
|
SC Growth |
S&P SmallCap 600 Growth |
25% |
6% |
|
SC Core |
S&P SmallCap 600 |
41% |
19% |
|
SC Value |
S&P SmallCap 600 Value |
52% |
41% |
What is often not included in the discussion of active vs. passive fund management is what happens during market downturns. The next table shows two recent extreme bear markets, the 2008 meltdown and the 2000-2002 bear market (the only time the market has had three negative years in a row). As can be seen from the table, the numbers are not encouraging for those favoring actively managed funds, even during a bear market.
Bear Markets: % of Active Funds Outperforming Their Index
|
Mutual Fund Category |
2008 |
2000-2002 |
|
LC Growth |
10% |
51% |
|
LC Core |
48% |
47% |
|
LC Value |
78% |
64% |
|
MC Growth |
11% |
16% |
|
MC Core |
38% |
30% |
|
MC Value |
33% |
17% |
|
SC Growth |
5% |
12% |
|
SC Core |
18% |
29% |
|
SC Value |
27% |
42% |
|
All Large Cap Mutual Funds |
46% |
46% |
|
All Mid Cap Mutual Funds |
25% |
23% |
|
All Small Cap Mutual Funds |
16% |
28% |
Using Screening Tools to Select Actively Managed Funds
The Exceptions