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Mutual Funds Fun Facts: Active Management Is a Bad Bet

By Motley Fool Staff – Oct 27, 2016 at 8:02PM

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Index funds beat most managed funds most of the time -- and even more so in recent years.

In this week's Motley Fool Answers, Alison Southwick and Robert Brokamp reveal some lesser-known facts about these pooled investment vehicles. This tidbit is something we at the Fool have been emphasizing for a long time: In any given year, most of the so-called experts are not going to outperform their benchmark indexes. And the ones who do... well, just listen. 
A full transcript follows the video.

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This podcast was recorded on Oct. 4, 2016.

Alison Southwick: And the third thing you maybe didn't, but probably should, know about mutual funds is that most actively managed funds lose to index funds, particularly lately.

Robert Brokamp: Right. I think a lot of people know that the majority of actively managed funds don't beat a relevant index fund. What they may not know is that the record is just getting worse. According to a Bloomberg article from a couple of weeks ago, only 9.5% of large-cap funds have beaten the S&P 500 over the previous five years. That's one of the worst records in history, and it's the lowest percentage since 1999.

Southwick: Wow.

Brokamp: Now, these things come and go -- there are cycles -- and if you were to talk to the active-management industry, they would give you reasons like, "Well, it's a different kind of market. It's being juiced by the Fed, and by having these low interest rates." If you look back, for example, even as recently as 2009, the majority of large-cap funds beat the S&P 500. So it does go in cycles.

I think it's important to know that, first of all, owning an index fund somewhere in your portfolio is going to be a winning strategy as part of your portfolio. No question about it. But we are in unusual times, so if you have an actively managed fund that has a good long-term record, but that hasn't been looking so good over the past three years, you may not want to boot it just yet. You might want to give it a little more time.

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