Editor's Note
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Active Management Beats Index Investing?
After coming across some recently published (and badly flawed) research on the topic, Professor Craig Israelsen set out to really look at the facts of the active vs. passive management debate. We strongly feel that his submission raises the level of the dialogue on the subject and lays the foundation for further research and exploration. In essence, Israelsen's paper shows that actively managed funds, by assets, appear to have (ever so slightly) outperformed the indexes over the past five years. Professor Israelsen's research has two key mechanisms. One is that it looks at assets and not at the sheer number of mutual funds that beat or lag their benchmarks; that seems fair, as simply counting the number of funds skews the results toward overpriced and badly managed active funds with low levels of assets. He also gamely attempts to compare apples-to-apples by aggregating various index returns and grouping both indexes and active funds in each of the nine Morningstar style boxes. Most research up to now has done the apples-to-oranges comparison of the S&P 500 (or some other large-cap-oriented index) vs. the total universe of active managers. As if that weren't enough, Matt Hougan follows up with a profile comparing Vanguard's active and index offerings. For as well-known as they are for their index funds, Vanguard actually has more assets under management in active funds than in index products. Matt demonstrates that Vanguard's actively-managed funds appear to wallop their index offerings, which may explain the balance of assets. He discusses whether things are as they seem, and if so, why this may be. Did I mention that this was a controversial issue of JoI? Bringing it home is an article by Brad Zigler on TRAKRs, and a wonderful excerpt of our heretofore top secret Editorial Board meeting, at which the usual stellar cast of board members, as well as William F. Sharpe, Robert Shiller and Don Chance from the world of academia, participated at the biannual meeting in December. Please DO send in those letters, particularly if you are feeling angry or indignant. Sending around the Israelsen research has already prompted a lively (to say the least) trail of emails. We're hoping it will spur you to write inspired letters to the editor and submit further research on the subject.
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This issue will be one of the most controversial we have ever run. Led by a fiery, lucid speech by John Bogle (which breaks some new ground), and lively commentary from Gary Gastineau, the issue also includes two articles that show strong recent performance by actively managed mutual funds. We didn't plan things this way...
