Fundsters interested into the continual debate about passive versus active mutual fund management may want to take a look at some research on the subject highlighted in the Monday edition of the Wall Street Journal
. According to a new study from William Thatcher
, a financial advisor at research and consulting firm Hammond Associates
, found that the conventional wisdom, which says that indexing is good for large funds and that active management is good for small-mid sized funds, may be wrong. Instead, what matters most is market efficiency, and indexing is most useful when a stock category is hot.
"Indexing tends to beat active management in top-performing asset classes -- no matter how efficient they are -- and it loses to active management in the worst-performing asset classes," the WSJ
in its monthly Investing in Funds report.
The study observed and compared fund performance to a number of indexes between 1997 and 2007. For example, in those ten years, the top-performing S&P MidCap 400 index beat 78 percent of actively managed funds, while the large-stock S&P 500/Citigroup Growth measure, one of the lowest-performing indexes during that period, was beaten by 65% of active managers. The key finding is that as performance declines, the percentage of active managers trailing the indexes also declines. Fund size does not play a large role.
"In the best-performing asset classes, index funds are rewarded for their purity and active managers are punished for their impurity," Mr. Thatcher told the Journal. "The bottom line is that the more style-pure a fund is, the better it performs when its style does well, and the worse it performs when its style does poorly."
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