Actively Managed Funds are a Losing Bet

By on February 27, 2010

Richard Ferri has written two articles in Forbes recently making a strong case against actively managed funds. Many fund managers have been beating their chests bragging how they beat the S&P 500 index over the past 10 years (not a tough benchmark). Ferri claims that they are making incorrect comparisons:

The swings back and forth between active managers performing OK and then performing poorly does not mean managers are smart and then become dumb; it means the methods for measuring performance need fixing. There shouldn’t be these swings. I am happy to report that measurement analysis has changed since the days when everything was measured against the S&P 500. Mutual fund analysis has become more precise; and this is not good news for active managers.

Two companies now publish bi-annual mutual fund “style” analysis reports that do apples-to-apples style comparisons. The McGraw-Hill Cos.’ S&P unit publishes the SPIVA, which compares active managers to appropriate S&P style benchmarks. Morningstar, Inc. publishes the Box Score, which compares active managers to their appropriate popular Morningstar Style Boxes. Both reports are interesting reads. Not surprisingly, both the SPIVA and the Box Score show that the average active manager has not kept pace with the appropriate indexes.

In Ferri’s other article he makes a strong case that actively managed mutual funds are a bad bet since only about 1 out of 3 outperform the index over the long term. Those that beat the index only do so by 1/2 the amount that the losers lose ground.

SMA Comment: I compare the SMA Portfolio with the S&P 500 because most individuals are familiar with it and long term performance is readily available. I checked the SPIVA and Morningstar Box Score for 10 year performance numbers, but they don’t appear to be available for that period. When longer term performance numbers are available, I’ll make the comparisons. Anything less than a 10 year timeframe is not a good measure of system’s effectiveness.

Sources: Forbes 2-16-10
Forbes 2-15-10

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