List of Index-Beating Funds Remains a Short One

Yes, the average U.S. stock fund is trouncing the S&P 500 index so far this year, but the argument for index funds is still going strong.

Right or wrong, investors tend to flock to funds that have performed the best over the past 18 months or so. As tech- and biotech-heavy growth funds have sprinted ahead of S&P 500 index funds over the past year and a half, flows to index funds have tapered.

But look beyond the very recent past, and index funds still prove their mettle. Consider that of the 1,530 U.S. stock funds that have been around for at least five years, only four have beaten the S&P 500 in each of the last five calendar years.

The upshot: While in years like this one it might seem easy to pick a fund that will beat the market, it's pretty tough to pick a fund that can do it year in and year out.

Stock Pickers Prevail At least this year. But in the long run, the S&P 500, represented here by the Vanguard 500 Index fund, has the advantage.
	YTD Return	3-Year Annualized Return	10-Year Annualized Return
Domestic Stock Funds	8.1%	16.1%	14.9%
(VFINX Quote)Vanguard 500 Index	3.3	19.4	17.5
Source: Morningstar. Performance figures through Aug. 22.

"It shows that just about every manager is going to have a rotten year from time to time," says Morningstar senior analyst Scott Cooley. "It's tough to consistently beat the market, and that's the bottom line."

The four funds that have topped the S&P 500 in each calendar year since 1995 are: (LMVTX Quote)Legg Mason Value, (WEHIX Quote)Weitz Hickory, (RYNVX Quote)Rydex Nova and (VIGRX Quote)Vanguard Growth Index.

Index-Beaters Only four funds have beaten the S&P 500 in each of the past five years.

Source: Morningstar

It's no surprise that Legg Mason Value, run by high-profile skipper Bill Miller, made the cut. Miller is famous for being the only fund manager to beat the S&P 500 in each of the past nine calendar years. And Weitz Hickory's appearance on the list explains why a gray market has developed for the closed fund's shares. Rick Lawson has run the fund since 1993.

The other two funds on this short list use indexing in their strategies. Rydex Nova uses leveraging and index futures to try to beat the S&P 500, and Vanguard Growth Index mirrors the S&P/Barra Growth Index -- an index of the highest-octane stocks in the S&P 500.

Where are all those go-go tech funds? Most missed the cut because small-cap tech stocks had a tough 1997.

"Even with a very pronounced bias toward growth stocks in recent years, there aren't many growth managers who beat the market consistently. Even if a manager jumped on the tech bandwagon and stayed there they still couldn't make this list because of 1997," says Cooley.

Of these four only Miller's fund is ahead of the S&P 500 so far this year, so our short list is on the verge of getting even shorter.