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Index Investing Beats Active Management (Again)

Chalk up another win for index investing in the active vs. passive management debate. Standard & Poor's semi-annual update on how often fund managers beat their benchmarks once again shows that paying higher fees for outperformance is usually a losing proposition.

The latest S&P Index Versus Active (SPIVA) scorecard reveals that with few exceptions, active fund managers underperform their respective benchmarks the great majority of the time. Frank Luo, senior director of S&P Indices Global Research & Design, sums it up like this:

Over the past three years, which can be characterized by volatile market conditions, 64 percent of actively managed large-cap funds were outperformed by the S&P 500, 75.1 percent of mid-cap funds were outperformed by the S&P MidCap 400 and 63.1 percent of the small-cap funds were outperformed by the S&P SmallCap 600.
It doesn't get much better from there. In the international equity categories, 57 percent of global funds, 64.6 percent of international funds and 80.8 percent of emerging markets funds were beaten by their benchmarks over the past three years, Luo writes.

Active management didn't disappoint in every category, however. A large percentage of international small-cap funds continued to outperform benchmarks, Luo notes, "suggesting that active management opportunities are still present in this space."

Looking farther back, the latest five-year data also deliver ammo to proponents of passive investing, as indexes beat a majority of active managers in nearly all major domestic and international equity categories, Luo says.

To be sure, there are many brilliant fund managers out there, professionals who more than earn their keep. The problem is you have to find them, pay higher fees for their active management -- and pray they can always outperform their benchmarks by a wide enough margin to cover the extra costs.

Good luck with that. As the great Wall Street speculator Jesse Livermore said nearly a century ago: "A man may beat a stock or group at a certain time, but no man living can beat the stock market."

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