Index vs. Managed Funds - The Debate Continues

While some funds will beat their relevant index by several percentage points, the problem for the average investor, say Wall Street analysts, is trying to figure out which funds will do it.

The battle between advocates of index funds and those who prefer actively managed funds will probably never end, and the results from 2009 aren’t likely to deliver a knockout blow for either side. Fund performance figures from last year show that actively managed funds did a little better versus the indexers than in 2008, but the majority of them still fell short of beating the Russell index that matched their stock-buying style.

Last year 48% of actively managed funds beat or matched their relevant Russell index, according to the fund research firm Morningstar, which was significantly better than the 43% that beat their index in 2008. Managed funds also outperformed the indexers by more than a full percentage point last year, turning in an average gain of 32.8%, compared to 37.7% for the index funds. That said, the Morningstar figures show a wide divergence in the results in individual stock categories. About 85% of actively managed funds that focused on small-cap value stocks beat their index, for example, while in the mid-cap growth category, only 24% managed that feat.

While some funds will beat their relevant index by several percentage points, the problem for the average investor, say Wall Street analysts, is trying to figure out which funds will do it. Too many investors chase past performance, they say, which, as all the financial ads are careful to note, is no guarantee of future returns. In the end, an investor may be better off looking at expenses, which would give the edge to index funds, some of which have expense ratios as low as 0.10%.