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S&P: Most actively managed funds have fared poorly

(MoneyWatch) While the active versus passive debate continues, the S&P Indices Versus Active (SPIVA) U.S. Mid-Year 2013 report found the same thing that it has found in the past -- while it's possible to win the active game, the odds are so low that it's not prudent to play. The following is a summary of the findings covering the five-year period ending June 2013:

  • 72 percent of all active domestic funds underperformed their benchmarks.
  • Active funds underperformed in all 17 domestic categories, with the underperformance ranging from 68 percent to 88 percent.
  • For domestic stocks the equal-weighted underperformance was 1.3 percent for large-cap funds, 2.1 percent for mid-cap funds, 1.8 percent for small-cap funds, and 1.9 percent for the multi-cap funds (which supposedly have the advantage of being able to shift across asset classes). The asset-weighted underperformance was slightly better (larger funds performed slightly better).
  • The results were similar for international funds. The only exception was small-cap funds, where only 18 percent of active funds underperformed their benchmark. Sixty-three percent of global funds underperformed, 66 percent of international funds underperformed and 75 percent of emerging market funds underperformed.
  • Results were similar in the bond market as well. For government bonds, the underperformance ranged from 96 percent for long-term funds to 56 percent for short-term funds. Within the investment grade space 90 percent of long-term funds, and 87 percent of short-term funds underperformed; strangely, 60 percent of intermediate funds outperformed. Only 6 percent of high-yield active funds outperformed, while 64 percent of municipal funds underperformed.
  • Nearly 27 percent of domestic equity funds, 24 percent of international equity funds, and 19 percent of fixed income funds merged or liquidated.

The bottom line is that while the percentage of actively managed funds that underperform changes from one report to the next, most investors in actively managed funds are finding that a belief in active management is a triumph of hype and hope over wisdom and experience. The good news is that each year more and more investors are learning that lesson and making the switch to passive strategies. The trend is slow, but persistent.

Image courtesy of Flickr user Howard Lake