When Index Funds Lose
The low-cost, market-tracking funds have their fans -- but they're not right all the time.
By SARAH MORGAN
WSJ
At first glance, a new report from Standard & Poor's tells a familiar story: index funds outperform active management, part 37. But a closer look shows that under the right conditions, funds run by a human stock-picker can be well worth their fees.
On the whole, S&P's "Scorecard" report doesn't look good for active management. For the five-year period ending June 30, indexes beat the majority of actively managed funds in 11 of 13 domestic stock fund categories; they also won out over domestic funds overall. The indexes triumphed in three out of four international stock fund categories, and in 12 out of 13 fixed-income categories. In some cases, it's not even close, with 80 or even 90% of active funds falling behind benchmark indexes.
But in the few places where active funds beat indexing, they won decisively, with about two-thirds of active funds outperforming. Pick the right spots, says Aye Soe, a director of global research at S&P, and "there is value in active management."
Whether actively managed funds can reliably beat their indexes has more to do with market trends than it does the skills of managers, especially over periods shorter than ten years, says Dan Culloton, the associate director of fund analysis at Morningstar. When a particular category of assets is doing badly in general, actively managed funds in that category often do better, because they have the flexibility to holding cash or sway slightly from their mandate. But when the same category takes off, that flexibility -- or style drift, as it's often called -- can cause an actively managed fund to lag. An index fund, on the other hand, will simply match the returns of the market, which can be a relative benefit in a rally, a detriment in a slump.
(More here.)
By SARAH MORGAN
WSJ
At first glance, a new report from Standard & Poor's tells a familiar story: index funds outperform active management, part 37. But a closer look shows that under the right conditions, funds run by a human stock-picker can be well worth their fees.
On the whole, S&P's "Scorecard" report doesn't look good for active management. For the five-year period ending June 30, indexes beat the majority of actively managed funds in 11 of 13 domestic stock fund categories; they also won out over domestic funds overall. The indexes triumphed in three out of four international stock fund categories, and in 12 out of 13 fixed-income categories. In some cases, it's not even close, with 80 or even 90% of active funds falling behind benchmark indexes.
But in the few places where active funds beat indexing, they won decisively, with about two-thirds of active funds outperforming. Pick the right spots, says Aye Soe, a director of global research at S&P, and "there is value in active management."
Whether actively managed funds can reliably beat their indexes has more to do with market trends than it does the skills of managers, especially over periods shorter than ten years, says Dan Culloton, the associate director of fund analysis at Morningstar. When a particular category of assets is doing badly in general, actively managed funds in that category often do better, because they have the flexibility to holding cash or sway slightly from their mandate. But when the same category takes off, that flexibility -- or style drift, as it's often called -- can cause an actively managed fund to lag. An index fund, on the other hand, will simply match the returns of the market, which can be a relative benefit in a rally, a detriment in a slump.
(More here.)
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