The Fund Industry's Talent Problem
The past three years' storm gave large-cap fund managers a great chance to outshine index funds. But most blew it anyway.
For years we've heard that most big-cap fund managers have a tough time beating cheap, large-cap S&P 500 index funds, which simply replicate that index. Over the past couple of years, however, active managers could've used bets on smaller stocks or even cash to top the index. Unfortunately, less than half did so in 2001 or over the past three years. And less than seven in 10 big-cap funds beat the index over the past five, 10 and 15 years, according to Chicago research house Morningstar.
So now, even some fund managers are asking tough questions. "What are you getting from your actively managed stock fund?" asked Invesco emigre and nascent hedge fund manager Jerry Paul, in a portion of last week's interview that ended up on the cutting-room floor.The upshot: For the vast majority of us it makes sense to use an index fund tracking either the S&P 500, like the (VFINX)Vanguard 500 Index fund; or Wilshire 5000, like the (VTSMX)Vanguard Total Stock Market Index fund, as a core holding in our stock-fund portfolio. If you'd like to use ETFs, or exchange-traded-funds, check out this primer. It's a good move to use index funds as your large-cap, core holding because the odds of us picking an actively managed fund that consistently beats those indices are slim. Let's check out the tale of the tape and then look at why so many folks with august acronyms like MBA and CFA after their names are, well, blushing. At the start of this year, some 270 large-cap funds had been around for at least 15 years. Just 54 of those funds had matched or topped the S&P 500 over that stretch, according to Morningstar. The S&P 500 has averaged a 12.6% annual gain over the past decade. That tops the average large-cap fund, whether it uses the aggressive growth style, the bargain-hunting value style or a blend of those two approaches, according to Morningstar.
The S&P 500 is still a brutal taskmaster
|Source: Morningstar. Returns through Feb. 28.|
|What Are the Odds?
The percentage of big-cap funds that top the S&P 500 over these periods
|One Year||Five Years||10 Years||15 Years|
|Source: Morningstar. Data through Dec. 31, 2001.|
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