Stock Pickers Lose Out To Index Funds - Again
Posted by Brent Everett on Tue, Aug 10, 2010 @ 12:40 PM
In another interesting Dow Jones article, the author points out that "the pain from the recent market downturn was felt far and wide—but not shared equally" and that "the classic type of mutual fund, which employs an army of stock pickers to invest in big U.S. businesses, has fared a lot worse than low-cost index funds which simply ride the ups and downs of the market."
That's not news to us, but it is apparently news to a lot of people. According to the article, investors have pulled more than $174 billion from U.S. large company stock mutual funds in the last three years and, in fact, these funds haven't experienced a positive flow since June 2009. Some of the industry's best-known names have bled investment dollars, including American Funds Investment Company of America (-$16.1 billion), Dodge & Cox Stock Fund (-9.1 billion), and Fidelity Contrafund (-$1 billion). In contrast, index funds have suffered much less. Large company stock index funds and ETFs have actually seen inflows of more than $147 billion in the last three years while actively managed funds were hemorrhaging.
This trend vindicates many investing experts and academics who have long questioned why individual investors pour money into actively managed funds that, as a group, seem unable to beat the market.
Before we celebrate, though, it is worth pointing out that individual investors have continued to chase performance in the "hot" areas of the market, particularly in emerging markets stocks and bonds. That being said, it's also interesting to note that the best performing emerging markets stock fund in the Morningstar emerging markets category (based on load adjusted 10 year annualized return) is DFA Emerging Markets Value, a passively managed fund. Oh, and we've been using this fund in our portfolio constructions for many years.
