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By Christine Benz and Shannon Zimmerman | 08-01-2012 01:00 PM

Where Active Has Beaten Passive This Year

After a rough 2011 for active managers, the average active fund has beaten its benchmark in only two categories in 2012. Is the trend here to stay?

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

The typical actively managed fund badly underperformed its benchmark in 2011. Joining me to give a recap of what's going on with active versus index fund performance so far in 2012 is Shannon Zimmerman; he is associate director of fund analysis at Morningstar.

Shannon, thank you so much for being here.

Shannon Zimmerman: Absolutely. Good to be with you again, Christine.

Benz: Shannon let's talk about active versus index fund performance. In 2011 the active funds really got clobbered relative to their benchmarks. What are you seeing as you look across the data so far this year?

Zimmerman: It's clobbering time again.

Benz: Same thing.

Zimmerman: It's not as dramatic, I think, so far at least as it was in 2011, but in every diversified domestic equity category that we track here at Morningstar--except two, and we'll talk about those in just a minute--the comparable index has beaten the average fund in those categories. The S&P 500 has beaten the typical large-blend fund. The S&P MidCap 400, which has always been a very difficult benchmark for active managers to beat, has beaten the typical mid-cap blend fund, and the same is true for the Russell 2000 versus small-cap blend.

Benz: So what are the two exceptions? What categories have active managers outperformed in.

Zimmerman: The envelope please. Large-cap value and mid-cap value. And you think about it--it kind of stands to reason, right? So value managers are sort of, by mandate, looking for bargains, and they are better positioned than the sort of dumb, so to speak, index to identify where the opportunities are. And then value is not as a style of investing any kind of monolith, and so some people are, like Marty Whitman, comfortable looking for distressed stories. And others are looking for relative value plays. If a space was going to outperform during a period when index investing was largely pacing the market, it seems to make sense to me that it would be in the value space.

Benz: So the value indexes might just own beaten-down junky companies, and they would ... have to do so, whereas the actively managed fund has more oversight and can make those active choices.

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