July 25, 2011 08:00 AM
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management
Investing aficionados love to debate the relative merits of index funds, which simply seek to replicate the performance of a market index, and actively managed mutual funds, which aim to generate market-beating performance. But there's no arguing with the numbers. We're talking here about a regular report from Standard & Poor's, a unit of McGraw-Hill, that's known as SPIVA, short for Standard & Poor's Indices Versus Active. This scorecard compares the performance of actively managed funds to an appropriate benchmark index. The fund performance figures are not adjusted for initial or back-end sales commissions.
Once again, the latest report--which came out earlier this year--found that most actively managed funds waged a losing battle over the five years through Dec. 31, 2010. Whether S&P analyzed funds in broad categories, such as all large-cap U.S. stock funds, or sliced the data more finely by looking at, say, New York municipal-bond funds, it found that a majority of funds lagged behind their category's benchmark index.
To this picture of failure, there were just three exceptions. A majority of emerging-market debt funds, international small-cap stock funds and large-cap U.S. value stock funds outpaced their category's benchmark index over the past five calendar years, according to the S&P study.
The overall poor showing shouldn't be a big surprise. Yes, money managers are often incredibly smart and incredibly well-informed. Problem is, they are competing against other incredibly smart, incredibly well-informed investors. And even if they manage to pick securities that post market-beating results, their overall performance may not be market-beating once costs are factored in, including money-management fees and trading costs.
To be sure, if you opt for index funds instead of actively managed funds, you will also incur investment expenses. But because the costs charged by index funds are usually much lower, you're less likely to underperform the target index by a wide margin--and thus you should fare better than most actively managed funds that invest in the same part of the market.
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.
Source: spiva.standardandpoors.com, 2011.The Standard & Poor's Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds' performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry. SPIVA scorecards show both asset-weighted and equal-weighted averages, include survivorship bias correction to account for funds that may have merged or been liquidated during the period under study, and show style consistency for each style group across different time horizons.
Past performance is never a guarantee of future results.
Remember, when investing in mutual funds, please consider the investment objectives, risks, charges, and expenses associated with the funds carefully before investing. You may obtain the appropriate prospectus by contacting a Financial Advisor. The prospectus contains this and other information, which should be carefully read before investing.
An investment cannot be made directly in a market index. Indices are statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower overall performance.
Municipal Bonds may be subject to state and local taxes and you may also be subject to Alternative Minimum Tax (AMT). Official offerings may be made only by the final Official Statement. If sold prior to maturity you may receive more or less than your original investment. Past performance is not a guarantee of future results.
Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk.
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