Most Active Funds Continue to Trail Index Performance

Through June, S&P finds most actively managed funds performed worse than comparable indices.

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 Most people's retirement nest eggs are invested in mutual funds as opposed to individual stocks. In seeking the best fund choices, investors have been steadily moving toward low-cost index funds. Besides savings money, a recent Standard & Poor's report indicates that investors may also be gaining superior investment results.

The S&P 500 index has beaten nearly two-thirds of all actively managed large-cap mutual funds over the past three years, the report said. Further, S&P's semi-annual SPIVA (S&P Indices Versus Active Funds) scorecard reported that 75 percent of actively managed mid-cap funds were bested by the S&P MidCap 400 index and that returns for 63 percent of small-cap funds were exceeded by the S&P SmallCap 600 index.

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S&P says its comparisons are adjusted to filter out the effects of old funds leaving and new funds entering the business during the measurement period, as well as asset differences among funds. S&P also said it factors different fund investment objectives into its measurements to make sure fund performance is measured fairly.

The debate over the merits of active versus passive fund management has been favoring passively managed index funds. Not only have they come closer to hitting their index targets, but they carry management fees that are often much lower than fees for actively managed funds. The growth of even lower-fee exchange traded funds (ETFs) in the past few years has confirmed the preference of many investors to find the lowest possible fees for "match the market" investment vehicles.

Even the cheapest index funds have some management, administrative, and transaction expenses and thus may fail to match the performances of their target indices. However, they come closer than many actively managed funds that try to post returns superior to overall market averages.

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"Among international equity categories," S&P added, "57.04 percent of global funds, 64.62 percent of international funds and 80.77 percent of emerging markets funds were outperformed by benchmarks over the past three years." However, it said, a large percentage of international small-cap funds continued to outperform benchmarks, "suggesting that active management opportunities are still present in this space."

Going back five years, the company said, "indices have outperformed a majority of active managers in nearly all major domestic and international equity categories." These findings included bond as well as equity funds.

Here is S&P's look at the one-year, three-year, and five-year performance records of U.S. equity fund categories and their comparable investment index.

Percentage of U.S. Equity Funds Outperformed by Benchmarks
Fund Category Comparison Index For Periods Ending June 2011
    One Year Three Years Five Years
All Domestic Equity Funds S&P Composite 1500 48.99 55.16 58.27
         
All Large Cap Funds S&P 500 60.47 63.96 61.28
All Mid Cap Funds S&P Midcap 400 66.67 75.07 78.81
All Small Cap Funds S&P SmallCap 600 47.48 63.08 60.69
All Multi Cap Funds S&P Composite 1500 59.73 67.34 67.26
         
Large Cap Growth Funds S&P 500 Growth 58.36 75.00 80.40
Large Cap Core Funds S&P 500 70.96 68.20 62.50
Large Cap Value Funds S&P 500 Value 45.40 44.13 35.32
         
Mid Cap Growth Funds S&P MidCap 400 Growth 82.14 84.12 88.02
Mid Cap Core Funds S&P MidCap 400 78.16 74.34 84.00
Mid Cap Value Funds S&P MidCap 400 Value 56.63 63.27 66.67
         
Small Cap Growth Funds S&P SmallCap 600 Growth 50.00 69.59 74.59
Small Cap Core Funds S&P SmallCap 600 60.50 64.98 59.38
Small Cap Value Funds S&P SmallCap 600 Value 39.64 52.29 47.67
         
MultiCap Growth Funds S&P Composite 1500 Growth 46.05 77.71 82.71
MultiCap Core Funds S&P Composite 1500 67.72 67.28 64.38
MultiCap Value Funds S&P Composite 1500 Value 50.65 54.90 54.04
         
Real Estate Funds S&P BMI U.S. REIT* 65.25 66.04 70.00
* Broad Market Index of Real Estate Investment Trusts    
           
Source: Standard & Poor's        

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