Is It True the S&P 500 Bested 96% of Funds in 1998?

Could you lead me to a survey that showed that 96% of U.S. stock mutual funds underperformed the S&P 500 in 1998. Does the 96% number sound right to you?

-- Jim Cosy

Jim,

Actively managed equity funds have been notorious lately for underperforming the S&P 500, but they didn't fare that badly last year.

In 1998, 17.2% of actively managed general equity funds (excluding index and sector funds) outpaced the S&P 500, according to Lipper. That's 555 out of 3,228 funds.

Morningstar came up with a similar number. According to that fund tracker, 16.9% of U.S. diversified stock funds beat the large-cap index, or 520 out of 3,075 funds.

These data will certainly give more ammunition to proponents of indexing, who maintain that it is far better to buy a low-cost index fund than to put your money in an actively managed fund that might not beat the benchmark.

But there also are investors who swear by putting their money with active managers. One argument is that the S&P 500 will, sooner or later, cease outperforming other areas of the market. What about when small-cap stocks finally make a comeback? Some professionals contend that in the small-cap market, fund investors have a greater chance of achieving outperformance with the right active manager than with an index fund. As the reasoning goes, you need an active manager to flush out small but solid companies in that area of the market.

The debate is endless. If anything, you can use these data for cocktail-party conversation.

In the Interest of Full Disclosure

In a Fund Forum last week, I wrote that fund companies are required to release complete holdings of their funds to shareholders only twice a year -- in their funds' annual and semiannual reports.

Over the weekend, I received email from three readers who mentioned the quarterly reporting requirements for investment mangers. "Most mutual funds and other investment companies must file a Form 13F with the Securities and Exchange Commission each quarter," wrote Jay Jupiter.

Some readers out there are probably crying, "No! Not another form from the SEC!" But here goes.

The 13F is a quarterly report of equity holdings by institutional investment managers who have equity assets under management of $100 million or more. Banks, insurance companies, investment advisers, investment companies, foundations and pension funds may be included in this category. The forms have to be filed within 45 days after the end of the quarter.

Investment advisers do not have to provide these documents to fund shareholders. And investment managers are not yet required to make the filings electronically. That requirement does not start until April of this year, says Alan Goldberg, an attorney with Bell, Boyd & Lloyd in Chicago. Therefore, many of filings are not available on EDGAR and are not readily accessible via the Internet. (On EDGAR, the form is the 13F-E.)

Secondly, the equity holdings of an adviser are aggregated in the filings, which will include all accounts run by that institutional investment manager. The holdings are not broken out fund by fund. Simply, the 13F is not intended to show which mutual funds are holding what.

Financial information providers like CDA/Spectrum collect the data in the 13F filings to compile information on securities ownership. Certainly, someone can peruse an investment manager's 13F filings and ascertain which stocks the firm likes. The filings would certainly indicate if a firm is increasing or decreasing its stake in certain sectors and particular holdings.

But I don't think these filings are of any practical use for individual fund shareholders. Frankly, I wouldn't want to spend the time untangling these documents every quarter, particularly for a large fund company. I looked through a 13F filed by FMR Corp., the parent of the Fidelity funds. It felt a bit like cracking open Gray's Anatomy.

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