Investors Are Shunning the Pros

Last Updated Oct 2, 2009 8:25 PM EDT

As I mentioned Sept. 4, the trend toward passive investing continues to gain momentum. Now, it looks like investors are still moving in this direction despite good showings from some popular funds.

According to the Wall Street Journal, Morningstar found that $11.6 billion of new assets have gone into index funds so far this year, while $5.6 billion was withdrawn from actively managed funds. Perhaps one reason is that 2008 provided further evidence that one of the myths about actively managed funds is they protect you from bear markets.

Consider Dodge & Cox's performance and the reaction from investors. Last year, the Dodge & Cox International fund lost 47 percent of its value, while the S&P 500 Index lost 37 percent. This year, the fund has rebounded and was up 45 percent, versus 20 percent for the S&P 500. However, investors had pulled $790 million from the fund as of mid-year.*

This continued shift may be why total worldwide assets under internal indexed management grew 11 percent during the first half of this year, rising to $4.67 trillion from $4.18 trillion. This was the first six-month period increase since the last half of 2007. The increase for international equities was even greater, up nearly 20 percent to $1.1 trillion from Dec. 31 to June 30.

Investors continue to learn that while active management does provide you with the possibility of market-beating performance, the far greater likelihood is underperformance. The flow of funds data indicates they are getting tired of the poor and inconsistent performance of actively managed funds.

While Wall Street and the financial media touts the benefits of active management, consider the following words of advice from two investment legends.

Peter Lynch

  • "[Investors] think of the so-called professionals, with all their computers and all their power, as having all the advantages. That is total crap. ... They'd be better off in an index fund."
Warren Buffett
  • "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals."
* In my haste, I asked my editor to grab an example from the Wall Street Journal article to add to my post after I submitted it. Unfortunately, the Wall Street Journal used a bad benchmark, and my editor didn't catch it before the post went live. The Dodge & Cox fund should NOT be compared to the S&P 500, but the MSCI EAFE Index, which lost 43.4 percent in 2008 and has rebounded 16.5 percent through the first half of the year. The point is still the same: Investors are realizing that index and passively managed funds are the right tools for a winning investment strategy.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.