Playing The Averages

Over the past five years, 75 percent of all actively-managed funds lagged the S&P SmallCap 600 Index. Among small-cap growth funds, more than 93 percent were outperformed by the S&P/BARRA 600 SmallCap Growth Index while the Value Index beat 57 percent of all small-cap value funds.

As these results show, it’s hard to beat the market. Moreover, it’s especially hard to repeat outperformance over time. S&P looked at the small-cap funds that were in the top quartile for the five years through May 2000. Results:

• In the next five years, only 3 percent of those funds stayed in the top quartile.
• During the second five-year period, 36 percent of the superior funds went from the top quartile to the fourth quartile.

S&P concludes that the odds are against investors who choose actively managed funds. Fortunately, several small-cap index funds and exchange-traded funds (ETFs) are available to investors who prefer this approach.