In the perpetual performance contest between actively managed mutual funds and their lower cost, index fund rivals, the winner for 2006 is1/4both, according to a report from The Wall Street Journal.

In five out of the nine major U.S. stock fund categories as defined by the Chicago investment research firm Morningstar, however, actively managed funds beat their target indexes. But that doesn't mean man triumphed over machine, warned Russel Kinnel, director of research at Morningstar.

"If you think active managers did better, take a closer look," Kinnel told The Journal, calling the race a "much more nuanced story."

For instance, the manager of a small-cap fund will typically beat their index in a given year, and small caps account for three of the five actively managed winners in 2006. But in a relatively surprisingly turn of events last year, active managers claimed rare victories in the large-cap blend and large-cap growth categories.

"Energy stocks performed extraordinarily well, and many growth managers were overweight energy," noted Derek Sasveld, senior asset allocation strategist at UBS Global Asset Management in New York.

Kinnel additionally pointed out that large-cap managers got a little help from the composition of the S&P 500, which is heavily invested in battle weary stocks like Pfizer and General Motors. Whereas the active manager could have dumped those securities, their competition is forced to hold onto them because they are composites of the index.

The success of international stocks in 2006 also played a role, said Bruce Herring, chief investment officer at Fidelity Investments in Boston.

"To the extent that funds held anything from the overseas markets that outperformed that helped mutual funds" against their benchmarks, Herring said.

Gus Sauter, chief investment officer at Vanguard Group in Valley Forge, Pa., added that in the long run, "the indexes generally shine."

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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