Why Mutual Funds are better than Index Funds

[TN_POKER_MAN]

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So you end up paying the manager 2% a year to churn money around the same universe of stocks.

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no i don't. There are plenty of good mutual fund managers out there that beat the index (even on a net cost basis). I'm sorry, but its about value and not cost.

[player24]

I keep hearing, in this forum, about comparisons between actively managed mutual funds and the S&P 500 - and 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 - broader market indices to not make good benchmarks for passively managed funds (because the funds will usually have to be underweighted the smaller cap names in the index). I own FSTMX from Fidelity - but it is not considered a genuine index fund, for the aforementioned reason.

Never-the-less, I'll play along. ---> Returns of multi-cap value funds were 10.73%, 10.08%, 6.22%, 10,14% over the past 1, 3, 5, and 10 years respectively. These funds beat the S&P 500 index funds in each of the aforementioned periods. Is the Beta of these funds, in aggregate, materially higher than the Beta of the S&P 500? I am not aware that this is the case.

However, making comparisons to the Russell 2000 index, which by design represents small cap equities (many of which are too small to be overweighted in actively managed funds) does not alter the outcome. The Russell 2000 has returned 8.05%, 9.46%, -1.35% and 10.05% over the past 1, 3, 5 and 10 years respectively. It looks to me like the actively managed funds outperformed. (And these are only the averages, the better performing mutual funds killed the indices).

Past performance may not be indicative of future results - but to distort the historical facts (from the recent 10 years) is unwise.

[Sniper]

There are fund categories for a reason!

Small cap and mid cap funds/indexes have a long record of beating the large cap (ie SP500). This goes back to the Law of diminishing returns again. Larger companies just cant grow as fast as smaller ones.

That is why cat said that comparing a multi-cap value fund to the SP500 was apples and oranges.

A smart investor will diverify across capitalization, growth vs value, sectors, international, etc

However, many investors dont take the time to do their homework and therefore the recommedation for them is to stick to an index fund, as the higher performance of other funds also comes with higher volatility.

It is fairly comonly known that a high percentage of people allocate their funds in their 401K in the same manner as the example portfolios presented at their companies 401K info sessions, simply because they figure the guy doing the presenting must know more than they do.

[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.

[Sniper]

Link to a recent article on this topic...

http://biz.yahoo.com/brn/050713/16266.html?.v=1

[Peter666]

Hi Meow Meow,

I have a cat by the same name. I play Black Jack semi- professionaly and have been vociferously reading Poker books for the last four months. I haven't posted anything about poker yet because I don't have anything worthwhile to say, and all my questions are addressed in old posts.

I'm pissed because of the new gay marriage laws in Canada and the cultural acceptance of a man's hairy anus as a sexually accepted organ. So while the politicians are earning a living legislating this crap, a normal family man has to continue being a wage slave, paying 50% or more in taxes, which makes it unfeasible to have children at a young age, which I want to do. So there.

I don't really love mutual funds, but anything that makes me money while I do next to nothing is a God-send.

[Peter666]

There is a good service at Fool.com called Champion Funds which researches and points out the best mutual fund market beaters.

[meow_meow]

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I'm pissed because of the new gay marriage laws in Canada and the cultural acceptance of a man's hairy anus as a sexually accepted organ. So while the politicians are earning a living legislating this crap, a normal family man has to continue being a wage slave, paying 50% or more in taxes, which makes it unfeasible to have children at a young age, which I want to do. So there.


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I'm sorry, how is gay marriage connected to your wage slavery again? I must be a bit obtuse.

I can never understand why some heterosexual men fear/loathe gay men, when they should be happy with the reduced competition for heterosexual women.
Wait, I do understand, it's simple, irrational human xenophobia.

[Peter666]

My point about the wage slave thing is that there are incredibly more important things that politicians should be doing instead destroying the last vastages of Christian civilization.

And in terms of reduced competition, the rise of lesbianism negates that.

[Sniper]

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the rise of lesbianism

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--> Sending 2 lesbians your way.. that should stop your worrying about that real fast [img]/images/graemlins/wink.gif[/img]

Getting a bit off topic, fwiw, this is probably better discussed in the politics forum [img]/images/graemlins/smile.gif[/img]