A new report rekindles an old debate: Should you invest in stock mutual funds that are actively managed?
A new report from the S&P Dow Jones Indices continues an old debate: whether you should invest in stock mutual funds that are actively managed or choose funds that are passively managed.
In 2015, a majority of active managers underperformed when compared with the relevant S&P benchmark stock market index, according to the latest S&P Indices Versus Active U.S. Year-End Report.
Better known as the SPIVA Scorecard, this biannual report “has served as the de facto scorekeeper of the active versus passive debate” since its inception 14 years ago, the 2015 edition states.
Actively managed stock mutual funds are run by financial professionals who decide which individual stocks within a fund to buy and sell. They make these judgments based on their expectations of future market performance with the goal of outperforming stock market indices — and they charge higher fees for their effort.
Passively managed stock mutual funds, often referred to as index funds, simply aim to mirror the success of a stock market index.
As Money Talks News founder Stacy Johnson explains in “Beginning Stock Investor? Here’s All You Need to Know“:
Owning an index fund is like owning the entire stock market, as represented by an index, like the S&P 500. Since all an index fund manager has to do is buy the stocks in the index, a chimpanzee could do it. And because management is simple, the fees charged are minimal.
So how did active managers fare last year? According the U.S. SPIVA:
- 66.11 percent of large-cap managers underperformed the S&P 500 stock market index, which consists of a representative sample of 500 leading companies in the foremost industries of the U.S. economy and covers more than 80 percent of the U.S. equities market.
- 56.81 percent of mid-cap managers underperformed the S&P MidCap 400 stock market index, which consists of 400 mid-sized companies and covers approximately 7 percent of the U.S. equities market.
- 72.2 percent of small-cap managers underperformed the SmallCap 600 stock market index, which consists of 600 small-cap stocks and covers approximately 3 percent of the U.S. equities market.
Aye Soe, senior director of index research and design at S&P Dow Jones Indices, tells CBS MoneyWatch:
“Overall it was rather disappointing for equity managers, I have to say. [The volatile market] was precisely when we need active manages to do better on a relative basis.”
The news is even worse for active managers when their performance over the past five years and past decade were considered:
- Over the past five years, 84.15 percent of large-cap managers, 76.69 percent of mid-cap managers and 90.13 percent of small-cap managers underperformed their respective benchmark indices.
- Over the past 10 years, 82.14 percent of large-cap managers, 87.61 percent of mid-cap managers and 88.42 percent of small-cap managers underperformed their respective benchmark indices.
Where do you weigh in on the active-versus-passive debate? Let us know below or on Facebook.