Sometimes, it seems like most managers can't beat the
no matter what they do. But for 21 mutual funds, the job just got a little easier.
, the fund-tracking company, released its 1998 returns in the first week of January, it pegged the return for the S&P 500 (with dividends reinvested daily) at 28.72%. Since mutual funds typically reinvest dividends earned on the companies they own, this is the benchmark of the industry, the magic number against which mutual funds are judged.
But last week, Lipper revised the S&P 500 return downward to 28.58% -- 14 basis points lower. And that elevated 21 mutual funds that otherwise would have slightly underperformed the benchmark to the illustrious realm of beating the S&P.
Lipper and S&P blamed each other for the mix-up.
The original return came from
Standard & Poor's
at the close of business Dec. 31, says Lipper spokeswoman Melissa Daly. The fund company wasn't aware that the number may have not been final, she says.
"S&P gives their value at the end of each day, and that's when we get it," Daly says. "On Dec. 31, they gave it to us, and they never then
said to us that it would be adjusted."
Robert Barriera, director of index products for Standard & Poor's, says the company didn't give out the final number until Jan. 4, the first business day of the new year. He suggests Lipper may have gotten a preliminary number on Dec. 31.
"To my knowledge -- and I would know because that information comes directly from my area here -- we did not restate any of our returns at all," Barriera says. "That would have been pretty major."
In any case, the adjustment was some unexpected good news for managers of the 21 funds that joined the ranks of the market-beaters, which now number 756 out of 6,062 stock funds tracked by Lipper.
Beating the index "is very important because otherwise, people should put their money in index funds. They shouldn't pay me to do their work for them," says Rosellen Papp, whose $14.7 million America Pacific Rim fund edged ahead of the S&P 500 by 10 basis points after the adjustment.
L. Roy Papp & Associates
, the fund's adviser, relies on word-of-mouth and media accounts to garner attention for its funds, she says. And one of the surest attention-getters is beating the index.
Because of the explosive popularity of index funds, beating the benchmark S&P 500 has become even more important, says Erick Kanter, president of
Kanter & Associates
, an Arlington, Va., mutual fund public relations firm. So much so, he drew up a list of his clients who beat it.
"People tend to focus more on who beat the index and who didn't," Kanter says. "But that's not necessarily what investors should be focusing on." Like many market watchers, Kanter notes that the S&P 500 is a collection of large-cap stocks and doesn't offer diversification in smaller-cap or international areas.
Interestingly enough, a handful of S&P 500 index funds also catapulted over their benchmarks because of the adjustment. Among them were the $74.2 billion
Vanguard 500 Index fund and the $1.7 million
USAA S&P 500 Index fund, both of which had returns of 28.62%.
"You're not there to beat it, you're there to track it," says Michael J.C. Roth, president of
USAA Investment Services
. But because index managers typically put incoming cash to use immediately by buying futures contracts on underlying stocks, a fund might outpace its index, he says.
Gus Sauter, Vanguard's indexing chief, says it's this area -- how managers put cash to use -- that can make a slight difference in an index fund's returns when adjusted for expenses. He also uses futures for this purpose.
"There is a difference between managing an index fund well and just buying 500 stocks," Sauter says. "An index fund with cash flow does place a burden on the manager to minimize investment costs that are going to add to the overall expenses of the fund."
Vanguard's index fund has a total expense ratio of 0.19%, while USAA's is 0.18%. Both are among the lowest in the category.
But all things equal, Sauter says no matter where the return of the S&P 500 winds up, it doesn't change the returns of the funds measured against it -- whether actively managed or indexed.
"Ultimately, it's merely keeping score," Sauter says. "Certainly there's no economic advantage to anyone because of the change. It merely turns some losers into winners, and we are talking about a marginal amount. Fourteen basis points is noise in an actively managed portfolio."
True, but now 21 more managers have one more thing to make some noise about.