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By Christine Benz and Shannon Zimmerman | 04-09-2014 02:00 PM

Active Funds That Beat the Index Trend

It's been tough--but not impossible--for active managers to beat their benchmarks over the last five years.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com.

Investors have increasingly been buying index funds and exchange-traded funds at the expensive actively managed products. Joining me to discuss whether recent performance supports that trend is Shannon Zimmerman, associate director of fund analysis with Morningstar.

Shannon, thank you so much for being here.

Shannon Zimmerman: Good to be with you, Christine.

Benz: Shannon, this is really the big question for many fund investors: Whether to invest in actively managed products or in index products. When you look at the data over the past five years, what do they say about the performance of these two fund types?

Zimmerman: If you look at the last five years--of course it's a nice bull run, a long bull run by historical standards--and by and large the typical active manager has not managed to beat a relevant benchmark.

In the smaller-cap categories, I took a look at it style-box square by style-box square. In the smaller-cap categories, actively managed funds did better, but still the best-performing category in terms of being able to beat the Russell 2000 among the small-cap categories, was small blend. And roughly half of the funds in the small-blend category surpassed what the Russell 2000 did over the last five years.

Benz: So small-blend active managers did best.

How about when you look at the large-cap funds? How did those active managers do there?

Zimmerman: Less well. The worst-performing peer group versus the relevant benchmark was mid-cap blend. If you look at that category versus the S&P 400, which is historically a very tough-to-beat index, sure enough, it was tough to beat over the last five years as well. About 11% of the funds over that five-year period in the mid-cap blend category surpassed the S&P 400.

It was a little bit better as you look at the large-cap categories, but not that much better. In the large-value category, for instance, about 17% of the funds surpassed the Russell 1000 value.

Benz: Not a great rate of outperformance there.

Zimmerman: No.

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