Active Mutual Fund Managers Can’t Seem To Beat The Indexes
Active mutual fund managers may tell you their expense is justified by market-beating results, but the data contradicts them, says Standard & Poor’s.
S&P does a regular study of mutual fund performance vs. passive indexes and regularly finds that most active fund managers can’t beat their respective indexes.
The latest study shows that over the five years from 2004 through 2008 two-thirds of domestic stock funds lagged behind the indexes. The results are similar to those obtained during a study of the previous five years, 1999 through 2003.
Among individual fund categories, large cap value funds had the best record, with only 53 percent losing out to the S&P 500 Value Index, while small cap growth funds had the worst relative performance as 96 percent of funds were beaten by the S&P SmallCap 600 Growth Index.
The recent bear market gave S&P another chance to examine the common wisdom that active managers can do better than the indexes in a bear market.
“One of the most enduring investment myths is the belief that active management has a distinct advantage in bear markets due to the ability to shift rapidly into cash or defensive securities,” S&P said.
The majority of active mutual fund managers failed to beat their respective indexes during 2008, just as they did in the 2000 to 2002 downturn.
The exceptions once again were managers of large value stock funds, S&P said.
It wasn’t just domestic stock funds that failed to beat the indexes—S&P found similar average underperformance among managers of international stock funds and fixed income funds.
Over five years municipal bond managers lagged by 2 percent behind the indexes, while corporate bond managers fell 1 percent behind.