Are Your Actively Managed Funds Beating the Index?

by Lee Distad

We’re constantly discussing ETFs/index funds and actively managed mutual funds even though the comparison is so unflattering to actively managed funds.

But don’t take it just from me. You need to do your own research on the performance comparisons.

By and large, what you’re going to find is that very, very few active funds consistently match the performance of the various indexes over the long-term, much less beat them.

Consider the following two charts. Both are purely illustrative examples.

The first shows the correlation between the S&P 500 and the SPY ETF that tracks it. The second shows the correlation between the NASDAQ index and the QQQQ ETF.


Using these as a benchmark, take the 5-year chart of any actively managed funds you own and overlay them on either of these indexes. Are you ahead?

Can You Find a Needle in a Haystack?

Finding a fund that consistently beat its index is like looking for a needle in a haystack.

Sure, fund companies will be happy to point to the performance of one fund or other, but it’s often not very good advice. It’s all well and good for fund companies to cherry pick the one or two of their funds that beat the market in the preceding twelve months, but as an investor, your job is ask about all of their other funds that didn’t.

The disclaimer that “Past performance is no indicator of future results” is something that you should take to heart. Hindsight is always 20/20.

Does Your Fund Even Have a History?

Beyond that, many actively managed funds have no real history you can use to evaluate their performance.

While fooling around with Google Finance, I found 3399 mutual funds listed. Picking examples at random from the list, easily 80% of them only had performance history going back a year or less.

For fund managers, it’s easier to shutter an under-performing fund and start pitching a new one with a new strategy than it is to admit that, on average, they are no better at managing client’s investments than a monkey with a dartboard.

In the world of money management, if you ask ten “experts” what you should do, you’ll get fifteen opinions. Keep an open, but skeptical mind.

Most importantly do your own due diligence. That alone will save you money in the long run.

Lee Distad consults with CE integration firms on design, installation and project management processes and Best Practices, and offers provides professional copy writing services for websites, brochures, and marketing initiatives. His freelance work covers topics from CE to global business to finance in both print and online.

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