Index Fund Adherents Point to S&P Scorecard

In the 12 months ending in October 2002, 6.5% of domestic equity funds were liquidated or merged -- and that doesn't include sector funds whose number have also shrunk. In the past five years, 16.2% of funds haven't survived.

Some Surprises

Though the S&P 500 index beat 63% of all large-cap funds over the past five years, the S&P Scorecard found that funds did relatively better over the bear market, with 54% beating the index over the past three years.

But before you dump your index fund in favor of an actively managed counterpart, take a look at how some of those funds beat the index -- it isn't simply expert stock picking.

Pane uses the perennial favorite (AGTHX Quote)American Growth Fund of America to illustrate how many funds were able to beat the index. "At the end of September it had 15% cash, was underweighted [relative to the S&P 500] in technology and had dipped into the mid-cap range," she says. "That strategy really helped the fund in the last three years."

The Growth Fund of America is down 4% in the past three years compared with the S&P 500, which is down 16%.

Investors who favor active management often acknowledge that indexing may be the way to go with large-cap funds, since active stock picking usually doesn't offer a tremendous advantage. The S&P Scorecard, though, provides a different perspective.

The S&P MidCap 400 index outperformed 93% of mid-cap funds over the five-year period and 83% over three years. The S&P SmallCap 600 index outperformed 67% of small-cap funds over the five year period, and 71% over the three bear years.

The S&P mid- and small-cap indices differ from the oft-cited Russell indices in the criteria used to include stocks. The Russell indices are simply a ranking of capitalization -- the Russell 2000 is no more than the smallest 2,000 stocks of the 3,000 largest stocks. Because of that, the Russell indices include more stocks and therefore must change their makeup more frequently than the S&P indices, Pane says.