Managed Funds Take Beating From Indexes

Wall Street Journal
April 22, 2009
By SAM MAMUDI

NEW YORK -- Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time.

That is double-bad news, given that the index was down 19% in the five years that ended Dec. 31. The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds.

What's more, those numbers are similar to the previous five-year cycle. From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 fell 18.8%, but still beat 71.9% of U.S. actively managed large-capitalization funds, according to S&P Index Services.

"We consistently see that once you extend time horizons to five years, the majority of active managers are behind their benchmarks," said Srikant Dash, global head of research and design at S&P.

Things were even worse for small-cap active managers, Mr. Dash said. The S&P SmallCap 600 outperformed 85.5% of small-cap funds. That index fell 0.6% over the five years to Dec. 31.

Even among emerging-market funds, most lagged behind their comparable S&P index. The S&P/IFC Emerging Markets Index bested 89.8% of actively managed emerging-markets stock funds in the past five years.

Actively managed bond funds also struggled. Except for high-yield funds, at least 80% of bond funds trailed their comparable benchmarks across all categories, Mr. Dash said. Because of liquidity issues, bond benchmarks aren't as easy to replicate by index funds.

Printed in The Wall Street Journal, page C13