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Actively managed funds
As their name implies, actively managed funds
invest in equity or fixed-income securities
based on the recommendations of a single manager
or management team, who charge a fee for their
services.
Strengths: Fund managers sell their services on their ability to "beat the street" with a number of tools: more focused and up-to-date research, in-depth knowledge of particular market sectors, constant monitoring of market conditions and the ability to respond quickly to market changes.
Weaknesses: Management comes at a price. Typically, actively
managed funds cost in the 1 percent to 3 percent
range. As a result, they must not only equal
the performance of their fund benchmark, but
exceed it by more than their fee in order
to actually "beat the street."
"You shouldn't always assume
that managed funds are better funds -- absolutely
not," says Morris. "The vast majority
of active-fund managers have a tough time
beating their benchmarks in the long haul."
Past
performance is no guarantee...
To echo the ubiquitous investment disclaimer, past performance is no guarantee of future results when it comes to either mutual fund style. But how have the rivals historically fared against each other?
Finance professors Stuart Michelson
of Stetson University in Deland, Fla., and
Rich Fortin of New Mexico State University
at Las Cruces studied active vs. index fund
returns over two periods, 1975 to 2000 and
2000 to 2005. The study, published in the Journal
of Financial Planning, used net return
figures, meaning active-fund managers had
to cover their fees as well.
The study found that, on average, index funds outperformed actively managed funds across the board, with the exception of two sectors: small capitalization stocks and international funds.
"If the market is moving a great deal up or down, but especially down, your index funds are going to be moving along with the market," says Michelson. "It's just that potentially the managed funds are going to be even worse than that."
Morningstar's Morris says fund managers have traditionally fared best in sectors where extra research and analysis can sometimes turn up market inefficiencies.
"In emerging markets, for instance, if you have a fund manager who has several analysts, boots on the ground in the country of interest, I think he's got the advantage, and possibly the ability, to add some incremental value there."
Not surprisingly, active-fund
managers fared better during periods of market
instability. |
