Why Mutual Funds are better than Index Funds

[DesertCat]

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as soon as someone produces some data which show that actively managed funds have outperformed, the comparison with the S&P 500 is labeled as "apples versus oranges". Most index funds are, in fact, benchmarked to the S&P 500

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Most large mutual funds play in the S&P 500 universe, so that's an apples to apples comparison.

When you choose a Multicap, or MidCap segment, those managers are playing in universe that offers them more and better choices. Their benchmark should be an index across a similar universe.

That said, the numbers you cite are impressive. It appears there now are two small categories of mutual funds (mid and multicap value) that are beating the S&P 500 over ten year periods. As a value investor, I'm not surprised that it's value funds that are doing it.

Note that your numbers indicate these categories were probably trailing the indexes a couple years ago. Results change, and they are now on a heater. Will the two categories be able to beat the indexes in the future? Why not just buy the best performers and assume they'll outperform over the next ten years?

My answer to these questions is that I don't know which ones are good, and which are lucky. I've already written about the problems with managers who outperform for five or ten years but end up with funds that are too large to outperform in the future. With no research you can buy an index and be confident you are going to beat most funds. You will never beat all funds. But you just have to beat the funds that would have been your other choices for it to be a good decision.