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Standard & Poor's has just added more firepower to the debate over active management vs. index investing.

The novel way in which Standard & Poor's calculates performance data makes the results more meaningful for investors interested in how actively managed funds stack up against the relevant indices. The results will also offer a few surprises for those swayed by arguments that "we're in a stock pickers market."

Introduced last week, the S&P Indices Versus Active Funds Scorecard, or SPIVA, provides both equal- and asset-weighted averages. The calculation also accounts for survivorship bias -- factoring in the performance of funds that were liquidated or merged, often because of weak performance.

Most performance comparisons are equal-weighted; that is, as a straight average. In other words, performance data from the $244 million

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William Blair Growth fund would count no differently than that of the $53.5 billion Fidelity's

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Magellan fund.

Asset weighting, though, takes into account the sizes of the funds averaged, and assigns a greater weight to larger funds. By weighing huge funds more heavily than small ones, asset-weighted figures demonstrate how a greater number of investors fared. "It takes into account what the investor experience really was," says Standard & Poor's mutual funds analyst Rosanne Pane.

In addition, asset-weighted averages help suss out the performance differences between large and small funds. For instance, in the past five years (incorporating both the best of the bull and worst of the bear markets), the S&P 500 lost 1.6%. In the same period, equal-weighted large cap domestic equity funds lost 1.5%. The asset-weighted fund performance, though, lost 2.9% -- almost double the equal-weighted average.

Both the asset-weighted and equal-weighted averages correct for "survivorship bias." Frequently, over the course of a study, actively managed funds get merged or liquidated. If those funds were to then be eliminated or "backed out" of the study, the performance figures would be artificially high. S&P's calculation accounts for disappearing funds, and tracks their performance all the way into oblivion.

In the 12 months ending in October 2002, 6.5% of domestic equity funds have been 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.

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Some Surprises

While 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


simply expert stock picking.

Pane uses the perennial favorite

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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% if 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 its makeup more frequently than the S&P indices, Pane says.