Active vs Passive Funds Report

[noppenbd]

S&P has released SPIVA 2008, which compares active funds vs passive (index) funds over the last 1, 3, and 5 years, and corrects for things like survivorship bias and equal vs asset-weighted averages.

The bottom line? Even during a bear market like 2008, index funds outperformed the majority of actively managed funds in 8 out of 9 categories:

http://www2.standardandpoors.com/spf/pdf/index/SPIVA_Report_Year-End_2008.pdf

To me this is astounding since index funds by definition are 100% invested at all times, and active managers presumably can go to cash at any point during a down market. This would seem to give the edge to the active managers but apparently it does not.

[Broken Arrow]

Very interesting, though somehow, it doesn't seem all that surprising anymore.... I think it's one of those classic scenarios of theory versus practice. In theory, it makes perfect sense that active managers should be able to see a declining bear market, and therefore take precautions against the fall. In practice, valuating an entire market is difficult, even for the best in the field, plus no one is psychic.

Anyway, thank you for sharing this. Very interesting indeed.

[DFrancis]

Index Funds

I have about 85% of my investments in index funds. They truly are the way to go for personal investors due to the tax efficiency and low expense ratios.

[conancare]

Hi DFrancis,
As index fund is a collective investment scheme which comprises of mutual fund as well. So what do you think of directly investing in mutual fund instead of index fund ?

Regards
Conan

[Scanner]

Examine the source of that study before you draw too many conclusions.

I am not "anti-index" but Standard and Poors are the one's conducting the analysis and they are the ones who set the index so of course any study they produce is going to be shown in favorable light.

Remember, these are the same chowderheads that rated Toxic Waste Triple AAA, good as cash.

[Broken Arrow]

That's a good point.

Although to be fair, S&P does not offer index funds that I am aware of, and therefore, does not directly benefit one way or another what kind of funds out-perform their indices.

[noppenbd]

Examine the source of that study before you draw too many conclusions.

I am not "anti-index" but Standard and Poors are the one's conducting the analysis and they are the ones who set the index so of course any study they produce is going to be shown in favorable light.

What exactly about this study don't you trust? They produce this study yearly and use the same methodology every time. To me a solid mathematically based study is much more convincing than something arbitrary and subjective like for instance Morningstar or Lipper ratings. Do you have an alternative study to share?

[simpletron]

To me this is astounding since index funds by definition are 100% invested at all times, and active managers presumably can go to cash at any point during a down market. This would seem to give the edge to the active managers but apparently it does not.

managers are limited by the prospectus. if the prospectus states that at least 80% of the holdings must be US large cap stock, then the manager can only go up to 20% cash. almost all active mutual funds state that a majority of the holdings will be in their core area and some impose limits on other asset classes. what you are thinking of is a hedge fund, where there are typically no limits on what they'll do.

That's a good point.

Although to be fair, S&P does not offer index funds that I am aware of, and therefore, does not directly benefit one way or another what kind of funds out-perform their indices.

this may or may not be true. I would think S&P get some sort of lincensing fee from the mutual fund companies for using their index. which may or may not be dependent on the amount invested in the fund. if it is dependent, then they would want to cast it in the best light to attract the most investment dollars. even if it isn't dependent they would still want to cast it in a good light, so their index funds don't have mass withdraws and mutual fund companies don't switch to a competitor's index. this fee would be hidden in the expense ratio.

if you combine all the active manage funds for one of the various classes into one massive fund, I would expect its pre-fee preformance to be very similar to the pre-fee preformance of the comparable index. if it isn't then I would said the index doesn't reflect what is really going on. since on average, active funds have higher expense than index funds, i would expect the majority of active funds do worse than their index counterpart regardless of the direction of the market.

[Scanner]

Noppen,

No, that's just it. . .I look at everything. . .Morningstar, Lipper, and if it's indexed or not. Frankly, I think mutual funds are starting to go the way of the Whigs and much prefer ETF's for managing my portfolio.

The expense ratios are usually lower and you can put stop orders on them and manage them like stocks. I plan to slowly transition out of mutual funds and be exclusively in ETF's.

Since a lot of ETF's do match indexes (not all), you could say I am pro "indexing." I just think the rating agencies got off Scott-free in this subprime debacle and I don't accept anything they say as gospel, especially when valuating risk.

[Snodog]

But I thought indexing was dead? Or at least thats what all the talking heads say on TV.