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As frequent readers of The Financial Woman know there is an ongoing discussion in the investment community as to whether actively managed mutual fund performance beats that of passive management using indexing and ETF (Exchange Traded Fund) products. Investment firms with actively managed funds of course support the former and independent studies support the later as the better performers especially after management fees have been considered factored into the equation. There is definitely a trend toward more investors managing their own assets with simple low cost passive index funds and ETF products. Investment companies have also taken notice as there has been a proliferation of new ETF products on the market recently. For example Charles Schwab has applied to offer its first ETF product according to Neil A. Martin’s article “Everybody in the Pool!” in today’s Barron’s describing the growth in the ETF market. Money managers are also increasingly getting into the business of managing ETF’s for investors. I believe that ETF and index investing is certainly simple enough for disciplined investors to manage this investment strategy on their own for those who choose to do so.
Sometimes the type of market we are in drives the results of this comparison meaning whether we are in a bull or a bear market but overall it appears as though passively managed funds are increasingly outperforming actively managed funds across the board. I have been wondering how active fund management has compared to passive fund management during the current bear market. I found the answer to that question during my Monday morning financial reads. According to an article by Karen Damato and Diya Gullapalli in The Wall Street Journal entitled “Managed Funds Offer Little Cover From the Bear” active portfolio management has not protected investors from the 54% loss incurred in the Dow Jones Industrial Average through its March 9 2009 low. From the stock market peak in late October through the end of March actively managed diversified U.S.-stock funds lost an average 47.6% according to Lipper fund researcher while passive index funds were down virtually the same at 47.8%. This article goes on to state that Morningstar’s Dan Culloton director of fund analysis concluded in a February report “active managers don’t have a lot to crow about”. The article further quotes David Booth cofounder and CEO of Dimensional Fund Advisors who offer indexing through their DFA funds as recalling that the median manager was down 60% while the Dow industrials fell 45% during the 1973-1974 bear market.
How did the performance of your portfolio compare to the decline in the indexes? This information is based on mutual fund performance not privately managed accounts or hedge funds. Mutual funds are more regulated and therefore the performance data is more easily obtained but regardless of whether you are in mutual funds or privately managed accounts these performance numbers should arouse your curiosity as to how your assets have performed in comparison to the indexes. If you use a privately managed account or hedge fund you can just call your advisor and ask for a performance comparison to the index that most closely compares to your stock holdings to obtain a quick answer. Morningstar publishes mutual fund performance in comparison to the related index and is available at most libraries.
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