Managed Funds Beat the S&P 500 Once Again

For the seventh time in a row, the average actively managed stock fund has topped the Standard & Poor's 500 index in 2005. However, experts urge investors not to abandon index funds just yet, according to USA Today.

Index funds attracted investors in the 90's with their low costs and high returns, and they have always been expected to clobber actively managed accounts for the same reasons.

However, diversified U.S. funds have beaten these funds, with the average actively managed fund gaining 6.6% last year, as opposed to 4.9% for the S&P 500, according to Chicago-based fund tracker Lipper. In fact, the average small-cap fund has skyrocketed 45% in the past five years, while the S&P gained only 15%.

Some mutual funds buy undervalued stock and wait for them to do better, and these value funds have also done better than the S&P 500.

The problem with the S&P 500 is it is weighted by market capitalization, and larger stocks have a greater effect on the S&P than smaller ones do.

There is no guarantee that small company stocks and value investing will beat the index in the future. Finding a find that surpasses the S&P 500 is not so easy. "It's often the case that about half of the funds beat the index in any given year," said Burton Malkiel, a director at Vanguard. "But it's not the same half every year."

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.