Welcome to the third installment of our weekly fund review, in which we take a look back at some of the more notable happenings in the fund world over the past week and tell you what it all means for Foolish investors.
New twist in active vs. passive debate
The battle between active and passive investment strategies is an old one, with firm believers on both sides of the camp. However, recent research from both Morningstar and Vanguard may throw a wrench into some of the more commonly held assumptions of this debate. For example, it was generally accepted that active investing was less profitable in the large-cap space because of the greater analyst coverage and higher visibility of these stocks. It then followed that active investing would have an edge over passive investing in more obscure, less-covered markets like small-cap stocks.
However, this new research indicates that this pattern does not necessarily hold when comparing the performance of active small- and large-cap managers to their respective benchmarks. The data also seems to show that the reason so many active managers may have trouble beating their benchmarks is because, for example, a value index is made up of pure value stocks, whereas most value-oriented mutual funds typically have some core and even growth-oriented holdings. Thus, there's a disconnect between the index and the individual fund's holdings.
Personally, this doesn't strike me as Earth-shattering news, or even anything that Fools need to pay too much attention to. I think it makes perfect sense that a value-oriented mutual fund might hold positions in some growth stocks, such as Best Buy
And as far as the question of active versus passive investing goes, I think there are merits on both sides of the debate. Yes, most fund managers do not consistently beat their benchmarks, but no, that doesn't necessarily mean you should throw up your hands and invest your whole portfolio in index funds. There are a number of good fund managers out there who beat the market more often than not, so keep your eyes peeled! This just stresses how important it is to take the time to research your funds before you buy -- to make sure you're buying those funds with the best chance of being winners. It can be done!
401(k) auto-enrollment on the rise
It used to be that enrolling in your company's 401(k) plan and choosing your contribution rate and investment options was something people did whenever they got around to it. Now, if you slack off on enrolling, more and more companies will be doing it for you. As it becomes clearer that most Americans are not saving anywhere near enough for retirement, and as 401(k) plans take on a greater role in most folks' retirement savings, recent regulations have prompted companies to take a more proactive role in making sure their employees are putting at least some money away. As a result, auto-enrollment plans are becoming an increasingly popular tool for employers to accomplish this.
All in all, this is a good thing. More people need to learn that they should start saving for retirement right away, and auto-enrollment provides a not-so-gentle nudge in that direction. Of course, problems could arise depending on the default option a plan provider uses -- if a 25-year-old woman is auto-enrolled, and all her contributions are going to a stable return fund, that's a problem. Such an investment will never provide the level of returns someone that age needs to meet her retirement goals. Of course, Foolish investors no doubt enrolled in their employer's retirement plan long ago, having thoroughly researched all of their investment options and chosen the most appropriate of those options to contribute to, right? Right?
If not, dust off your enrollment information and do some research. After all, it's better for you to make the decisions that directly affect your future financial security, than to have your employer do it for you.
Now that you know what's been happening in the world of mutual funds, take the next step and find out which funds represent compelling investments. The Fool's Champion Funds newsletter brings that information right to your doorstep. Fool fund expert Shannon Zimmerman shows you how to find the winning funds you've been looking for. Start your free 30-day trial today.