Update: Since originally writing this article, the 2009 and 2010 scorecards have been released as well. It’s the same story: Actively managed funds lose.
The results are in: S&P has released their Indices Versus Active Funds Scorecard for year-end 2008.
And guess what? It’s ugly. Active funds got crushed. The passive index benchmark outperformed the majority of active funds in 9 out of 9 equity fund categories (i.e., large cap growth, large cap value, etc.) for the 5-year period ending 12/31/2008.
Now, I freely admit that a 5-year period is shorter than ideal for making comparisons of equity funds. But before we conclude that this is a crazy coincidence, let’s back up a few years and take a look at the scorecards from prior 5-year periods.
- 2006? Active funds lost in 9/9 categories.
- 2005? Active funds lost in 9/9 categories.
- 2004? Active funds lost in 8/9 categories. (50.54% of actively-managed large cap value funds outperformed the index for that period! Go team go!)
I’ll spare you the rest of the years. But the short version is that it’s more of the same.
What about fixed income funds?
I’m glad you asked. A few figures regarding the 5-year period ending 12/31/2008:
- The passive benchmarks outperformed greater than 90% of actively-managed government bond funds.
- The passive benchmarks outperformed greater than 90% of actively-managed investment-grade corporate bond funds–with 100% (!) outperformance in both the long-term and short-term categories.
- The passive benchmark outperformed greater than 95% of actively-managed municipal bond funds.
If that doesn’t make you wary about investing in an actively-managed fixed income fund, I don’t know what will.
Why do most actively-managed funds do so poorly?
Simple: They cost too much. Most active fund managers have to beat their benchmark index by 1-2% per year just to break even on an after-expense basis.
A performance improvement of 2% may sound small. But when we remember that the total stock market’s long-term return is only 8-10%, it starts to become clear why so few funds are able to perform such a feat over any extended period.
Is it possible to beat index funds?
Yes. It’s definitely possible–as evidenced by the fact that the passive benchmark didn’t outperform 100% of actively-managed funds. Of course, it’s also possible to go to a casino, play blackjack for 8 hours and come out ahead. Doesn’t mean we should bet on it.