A respected semi-annual survey has revealed that 90 percent of actively managed equity funds failed to beat their benchmark indexes.
The data is sure to pour even more gasoline on a volatile argument which has divided Wall Street into “active” and “passive” investment-strategy advocates.
The S&P Indices Versus Active (Spiva) scorecard shows that 90.2 percent of the actively managed US mutual funds that invest in domestic equities were beaten by their benchmarks, the Financial Times reported.
“There was not a single category of domestic fund — whether investing in large-caps, small-caps or a combination, or favoring growth stocks or value stocks — in which more than a quarter of managers succeeded in beating their category benchmark,” the Financial Times explained.
“There is nothing redeeming to say about the managers in the equity space,” Aye Soe, global research director at S&P, told the FT. “They said they would provide downside protection and add value in choppy markets. This was their chance to prove themselves and earn their paychecks, but across every category they underperformed. It is embarrassing.”
The results “back the argument that investors are best served by passively managed funds -- low-cost funds that track indexes such as the S&P 500 or the Russell 2000. The other camp staunchly support active funds -- funds run by investment managers who try to beat the indexes,” Motley Fool has reported.
Meanwhile, conventional wisdom holds that active management can offer better returns than passive management by investing in securities that outperform the benchmark.
“Active managers can stand on the sidelines—go to cash—if market conditions warrant it. The question for investors is whether active managers will outperform, or whether benchmark returns will fall enough to justify taking a gamble on actively-managed funds,” Investopedia explains.
To be sure, during the past year, $310 billion "has fled actively managed funds run by people who try (and often fail) to pick the best" stocks and bonds. “Meanwhile, $409 billion has poured into passive, or index, funds that seek to match the market rather than beat it,” The Wall Street Journal reported.
Elsewhere, mutual fund sage and founder of the Vanguard Group Jack Bogle has hit back at “idiotic” critics of indexing, the practice of organizing one's portfolio to match an index.
Bogle started the indexing revolution for retail investors in 1976 when he launched the Vanguard 500 Index Fund. The fund, which just passed its 40th anniversary, had $205 billion in assets as of Aug. 31.
Critics of indexing, including the authors of a recent report by analysts at Sanford C. Bernstein & Co., contend that as indexing grows, markets will no longer price securities appropriately or allocate capital efficiently.
In a recent note titled “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism,” the authors said passive indexing is worse than being in a “centrally planned economy.”
Bogle called the report “idiotic, totally wrongheaded and terribly flawed.” Indexing has created great value, saving investors perhaps more than $1 trillion over the past 40 years, he told Bloomberg.
(Newsmax wire services contributed to this report).
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