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S&P Report: Over 50% of Active Managers Underperform

Ron DeLegge

Standard & Poor's has just completed its annual survey of money managers versus stock and bond indexes and the results for investors betting on investment professionals to steer them right aren't good.'With the exception of emerging markets debt, over 50% of active managers failed to beat benchmarks,' states the S&P report.The highest mutual fund categories with underperformance over the past five years were midcap stock and small cap growth funds where 78.19% and 72.68% of all actively managed funds underperformed their peer index. Put another way, ETFs linked to the S&P MidCap 400 Index (NYSEArca: MDY - News) and the S&P SmallCap 600 Growth Index (NYSEArca: IJT - News) handedly beat corresponding professional stock pickers.Here's another interesting tidbit: Troubled categories, like real estate and municipal bonds, did not benefit from active management.S&P found that almost 69% of real estate or REIT mutual funds were easily beaten by an index of REITs (NYSEArca: VNQ - News). Likewise, more than 86% of general munibond funds underperformed the S&P National AMT-Free Municipal Bond Index (NYSEArca: MUB - News) which is a broad measure of the U.S. munibond market. Bad as that may be, it gets even worse. Almost 100% of money managers of state specific munibond funds from California (NYSEArca: CMF - News) and New York (NYSEArca: NYF - News) were beaten over the past five years by corresponding indexes.One of the chief arguments for having professional money managers is they can avoid trouble stocks within a certain sector whereas an index cannot because it always remains fully invested. While that logic may sound plausible, money managers as a group haven't been able to convert their expert research or market timing talent into a winning formula for their shareholders. What about bullish areas of the market? Here too, money managers posted surprisingly disappointing results.Emerging market stocks (NYSEArca: EEM - News) have been one of the hottest performing investment categories over the past several years, yet a whopping 89.55% of emerging markets funds were beaten by an emerging market index during a five-year period. This raises another interesting question, with appalling overtones: If active managers cannot even outperform their peer indexes during good times, why should they be paid or trusted to do so at any other time?While the superiority of the indexing strategy speaks for itself, a stubborn army of mutual fund groupies are still selling the fanciful idea that that investors need to pick their mutual funds more carefully. Instead of that, the real translation from S&P's latest data is that people should be indexing their portfolios to the market using low cost index funds and ETFs.The S&P report of active funds versus indexes analyzed various mutual fund categories against corresponding S&P indexes.Percentage of Funds Outperformed by their Benchmarks 

Fund Category Comparison Index One Year% Three Year% Five Year%
All Domestic Stock Funds S&P Composite 1500 49.31% 51.68% 57.63%
Mid Cap Funds S&P MidCap 400 73.75% 83.90% 78.19%
Small Cap Growth Funds S&P SmallCap 600 Growth 61.63% 83.59% 72.68%
Govt Long Term Funds Barclays Long Govt 94.12% 65.96% 68.18%
Govt Intermediate Term Funds Barclays Intermediate Govt 68.29% 58.70% 68.09%
Govt Short Term Funds Barclays 1-3 Yr Govt 56.82% 58.70% 75.00%
High Yield Funds Barclays High Yield 75.50% 92.09% 92.37%
General Munibond Debt Funds S&P National AMT-Free Municipal Bond 60.67% 77.65% 86.08%
California Munibond Debt Funds S&P California AMT-Free Municipal Bond 84.21% 90.48% 97.50%
New York Munibond Debt Funds S&P New York AMT-Free Municipal Bond 64.71% 91.67% 94.29%
Global Funds S&P Global 1200 45.40% 52.76% 60.20%
Intl Funds S&P 700 39.83% 69.94% 81.71%
Emerging Markets Funds S&P/IFCI Composite 64.00% 77.55% 89.55%

Source: Standard & Poor's 2010 Scorecard of Active Funds vs. Indices