According to recent research by Standard and Poor’s – Standard & Poor’s Index Versus Active Fund Scorecard – a large majority of actively managed US stock mutual funds trailed their benchmarks. Certainly this is not a new development; however, the fact that actively managed funds performed so poorly during the market crash of 2008 must disconcert even their most ardent supporters.
The numbers: In 2008, 54% of large cap funds underperformed the S&P 500; 75% of mid-cap funds trailed the S&P Midcap 400, and a whopping 84% of small-cap funds trailed the S&P SmallCap 600.
Over longer time periods, the numbers are worse. This should not be a surprise, the longer the timeframe, the odds decrease that a manager can randomly outguess an index and overcome the drag from its own expenses. The most startlingly result was that 96% of actively managed small-cap growth funds trailed their benchmark for the five years ending 2008.
Results are similar for international funds.
As sobering as the above results are for stock investors, it is in fixed income where active management has failed most miserably. Perhaps this shouldn’t be surprising either; with yields low, containment of expenses becomes that much more significant and, therefore, expensive active management must overcome a heavier burden, decreasing their chances of success. Over five years, the percentage of fixed-income funds that outperformed their benchmark indexes in the standard domestic bond categories is less than 10%.
Posted June 26, 2009 by Nathan Gendelman
