Indexing Versus Active Mutual Fund Management

Fortin, Rich; Michelson, Stuart
September 2002
Journal of Financial Planning;Sep2002, Vol. 15 Issue 9, p82
Academic Journal
This article examines the benefits of active mutual fund investing versus index funds. There has been a longstanding discussion over the relative benefits of active versus passive management in the mutual fund literature. On the one hand, the very fact that there are thousands of investment professionals involved in active mutual fund management suggests that there must be benefits accruing to supposedly rational investors in these funds. On the other hand, both recent and long-term evidence points to the advantage of indexing over active management. On average, index funds outperform actively managed funds for most equity and all bond fund categories on both a before-tax and after-tax basis. However, actively managed Small Company Equity (SCE) funds and International Stock (IS) funds significantly outperform the index over most of the study period. Managers of these funds appear to be able to invest to take advantage of mispricing in these presumably less efficient markets. The overall results should be viewed with caution, however, as there is evidence that actively managed funds outperform the index funds during periods when the economy is either going into or out of a recession.


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