The past several years have given active investment managers plenty of opportunities to show that they can add value to the investment process. Recent studies have shown that individual stocks have become much more volatile than in the past, giving active managers a chance to demonstrate their stock-picking skills by picking winners and avoiding losers. In addition, large up and down movements in the stock market as a whole—from the bull of the late 1990s to the bear of 2000-2002—should also have given active investment managers a great opportunity to beat passive market indexes.
Unfortunately for investors, it hasn’t been so. A recent study by Professors Ernest M. Ankrim and Zhuanxin Ding found that during the period from July 1988 through December 2000 individual stocks here and abroad became more volatile than in the past, with wider price swings. Their statistical analysis of this period found that there was no evidence that active mutual fund managers were able to outperform the indexes.
Another study by Standard & Poor’s of the period September 1997 through September 2002 came to a similar conclusion. During that period, the S&P 500 Index beat 63% of all actively managed funds. On average, large stock funds lost more during the period than the index did. The S&P Midcap 400 Index beat 93% of funds that invest in midcap stocks, while the S&P Smallcap 600 Index beat 67% of actively managed small cap funds.
The studies also showed that the risk of active management increased because individual stocks were riskier during recent years. The risks of concentrating in individual stocks were higher because the potential losses were greater.
