"If the data do not prove that indexing wins, well, the data are wrong."
For the most part, the data appear to be true.
In statistics compiled for Money Management Executive by Morningstar, passively managed stock funds-those that do no more than match the component stocks found in an underlying index-achieved a 9.45% annual return over 25 years. That edged the annualized returns of actively managed stock funds (9.42%) and easily beat actively managed mutual funds of all types (7.89%). Passively managed mutual funds of all types came in at 9.08%.
Similarly, passively managed exchange-traded funds achieved the best annual returns over the last 15 years (6.19%) and last 10 years (8.96%).
But, after that, the data can be "wrong." Actively managed stock funds had the best performance over 20 years, edging passive stock funds 8.14% to 8.11%. And actively managed mutual funds of all types have done the best in the last five years, coming in at 1.98% where, for instance, passively managed exchange-traded funds lost 1.17% a year.
Which just goes to show, when it comes to investing, active management versus passive management "is not an either-or" proposition, said Russ Koesterich, chief investment strategist for BlackRock, the world's largest asset manager. "It's both.''
And, as if to prove the point, Vanguard Group, the company that became the largest mutual fund firm in the world from promoting the virtues of index investing, actually agrees.
In a research report posted on Jan. 8 to its website, Vanguard says "most actively managed equity funds will underpform their benchmarks.'' But it argues that there are "concrete ways of increasing the probability of success" with active management.
"On average, actively managed funds will not outperform'' the index against which they gauge their success, said Daniel Wallick, a principal in Vanguard's Investment Strategy Group and a co-author of the report. "But a subset will.''
And, perhaps not surprisingly, that subset includes funds actively run by Vanguard managers.
Many Vanguard investors, he notes, don't even know that the firm has actively managed funds. But Vanguard got its start handling administrative functions for an operator of active funds known as Wellington Management.
