There is building evidence that, over time, actively managed mutual funds do not outperform, and in some cases underperform, index funds. A recent article in The Economist discusses momentum investing (that is chasing the latest “hot” stock) and investigates why some stocks on occasion move up or down for an extended period of time based solely on “momentum.” What I found most interesting in the article is the discussion of mutual funds, and the fact that investors chase and leave funds as the funds go through periods of over- and underperformance, respectively. But this is likely a waste of time, and fund management fees, as all funds, over long time horizons, tend to revert to the median.
In fact, a recent study published by Standard & Poor’s confirms the mutual funds are not worth the costs they charge compared to simply investing in an index fund. The report concludes that “[o]ver longer time horizons, indicies continue to outperform active managers.” Specifically, the report demonstrates that over a five-year period ending June 2008, the S&P 500 Index outperformed 68.6 percent of all actively managed large cap funds, the S&P 500 MidCap 400 outperformed 75.9 percent of all mid cap funds, and the S&P Small Cap 600 outperformed 77.8 percent of all small cap funds.
Among other interesting findings in the report is that over 5 years, 26.8 percent of U.S. equity funds, 22.5 percent of global equity funds and 24.7 percent of fixed income funds had been merged or liquidated—and that was before the recent credit crisis-related market crash. The lesson from the report is that buying into an actively managed fund requires the same amount of effort towards doing one’s homework as buying an individual stock. Investors must always know what they own. For those who don’t have the time to do the work, buying into an index fund seems to be the better path to take.
[SOURCE: Standard and Poor's Indicies Versus Active Funds Scorecard, November 12, 2008]
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Gregg D. Killoren
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Managed Funds Do Not Outperform Index Funds
There is building evidence that, over time, actively managed mutual funds do not outperform, and in some cases underperform, index funds. A recent article in The Economist discusses momentum investing (that is chasing the latest “hot” stock) and investigates why some stocks on occasion move up or down for an extended period of time based solely on “momentum.” What I found most interesting in the article is the discussion of mutual funds, and the fact that investors chase and leave funds as the funds go through periods of over- and underperformance, respectively. But this is likely a waste of time, and fund management fees, as all funds, over long time horizons, tend to revert to the median.
In fact, a recent study published by Standard & Poor’s confirms the mutual funds are not worth the costs they charge compared to simply investing in an index fund. The report concludes that “[o]ver longer time horizons, indicies continue to outperform active managers.” Specifically, the report demonstrates that over a five-year period ending June 2008, the S&P 500 Index outperformed 68.6 percent of all actively managed large cap funds, the S&P 500 MidCap 400 outperformed 75.9 percent of all mid cap funds, and the S&P Small Cap 600 outperformed 77.8 percent of all small cap funds.
Among other interesting findings in the report is that over 5 years, 26.8 percent of U.S. equity funds, 22.5 percent of global equity funds and 24.7 percent of fixed income funds had been merged or liquidated—and that was before the recent credit crisis-related market crash. The lesson from the report is that buying into an actively managed fund requires the same amount of effort towards doing one’s homework as buying an individual stock. Investors must always know what they own. For those who don’t have the time to do the work, buying into an index fund seems to be the better path to take.
[SOURCE: Standard and Poor's Indicies Versus Active Funds Scorecard, November 12, 2008]
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