Last month, Standard & Poor's released its Indices Versus Active Funds Scorecard, a quarterly report on how many highly compensated mutual fund managers actually beat the index.
The Scorecard doesn't just present numbers. It also accounts for "survivorship bias" (i.e., funds that were liquidated or merged into other funds), compares fund performance to the proper index (instead of, for example, comparing a small-cap fund to a large-cap index), and factors in the size of funds (a $10 billion fund affects the average more than a $10 million fund).
So, what's the score? Who beat whom over the three-year period ending Dec. 31, 2002? The results are in:
In seven of the nine style categories (large-, mid-, and small-cap funds, broken into growth, value, and blend), the average actively managed fund lost to its respective index. The margin of difference ranged from 53.5% of large-cap blend funds underperforming the S&P 500 to 87.5% of small-cap growth funds losing to the S&P/BARRA 600 Small-Cap Growth index.
- The two groups of funds that did beat their indexes were large-cap value funds (with 36.5% underperforming the S&P/BARRA 500 Value index) and large-cap growth funds (posting a razor-thin victory, with 49.4% of the funds underperforming the S&P/BARRA 500 Growth index).
Keep in mind that 2000 through the end of 2002 was the worst three-year period for the U.S. stock market since 1941. Wall Street "wisdom" used to be that during such market downturns, indexing would flop, since it would take "experts" to find the jewels among the rubble. However, even during a long bear market, mutual fund managers have trouble beating an index.