The Secret Fund Managers Don’t Want You to Know

by Jason Unger

If your investments are being actively managed, your fund manager is likely keeping a big fat secret from you.

He doesn’t want you to know it, because he’d lose your business.

But it’s costing you money every day — your money.

The secret? Most active managers can’t even top the index they’re trying to beat.

Index Funds Outperform Actively Managed Funds, Again

According to new research from Standard & Poor’s, in the past 5 years, more than 71% of large-cap fund managers couldn’t beat the S&P 500 index they’re benchmarking against.

From the MarketWatch report:

The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What’s more, those numbers are similar to the previous five-year cycle.

From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 dropped 18.8% — but that was still enough to beat 71.9% of U.S. actively managed large cap funds, according to S&P Index Services.

“We consistently see that once you extend time horizons to five years, the majority of active managers are behind their benchmarks,” said Srikant Dash, global head of research and design at S&P.

We’ve talked plenty about index fund investing before, and how even if an active fund outperforms the index, fees will likely eat up the difference.

There’s a reason why VFINX, the Vanguard S&P 500 index, is one of the largest mutuals fund in the world (disclaimer: I invest in it). It’s got a low expense ratio (0.15%) and it invests nearly all of its assets in the stocks that make up the S&P 500.

But your fund manager doesn’t want you to know that you’re paying more and getting less. He doesn’t want to tell you that a nearly automated process can beat his “skills” in fund management.

Imagine a salesman telling you that you could get a better quality product for less money from his competitor. It would never happen.

If you’re investing for the long-run, don’t listen to Jim Cramer. Keep more of your own money.

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