With the goal of shedding some light on the murky active vs. passive mutual fund debate, Standard & Poor's has taken the step of releasing an in-depth quarterly scorecard that shows how managed funds fared against the relevant S&P benchmark.

The results for Q1 2003 show that active funds generally fared well against the indexes, particularly in the mid- and small-cap arenas. According to the report, 49.3% of large-cap actively managed funds beat the S&P 500. However, 72.9% of mid-cap funds bested S&P MidCap 400, while 73.4% of small-cap funds came out ahead of the S&P SmallCap 600 for the quarter.

Of course active funds won by losing less, as all nine equity "style box" indexes were in the red last quarter.

"Actively managed funds tend to be better positioned for a market recovery than their passive peers," said Phil Edwards, S&P's managing director of funds research, in regard to active fund outperformance against the indexes last quarter. "Fund managers that positioned their portfolios early in the quarter for a market turnaround were well rewarded when the market began to up-tick."

However, it appears active funds have struggled against the indexes over longer recent time periods.

"In the last three years, we've seen index benchmarks outperform 55% of large-cap funds, 68% of mid-cap funds and 73% of small-cap funds, results indicating that indices have fared better in bear markets than actively managed funds," said Srikant Dash, index analyst at Standard & Poor's. "These figures are even more compelling in the small-cap arena, which contradicts the common belief that active managers have an advantage over indices in this segment."

S&P keeps track of both equal-weighted and asset-weighted average performance for each fund category. Last quarter, asset-weighted averages lagged equal-weighted averages in all but two categories. These results have been consistent with previous findings, which suggests that funds with smaller asset bases may in general perform better than large funds, and that traditional equal-weighted average fund returns may actually paint a rosier picture of active funds that doesn't reflect the true investor experience. For example, in equal-weighted averages, a huge fund like Fidelity Magellan is treated exactly like an obscure new fund with a small asset base.

It should be noted that the S&P scorecard data adjusts for survivorship bias, so funds that close due to poor performance are accounted for. Indexing advocates claim not adjusting for survivorship bias skews the results in favor of managed funds. Over the last three years, 14.9% of funds were merged or liquidated out of existence, according to S&P.

Also, sector funds and index funds are not included in the S&P scorecard.

In a conference call today, Edwards noted that the results shouldn't encourage investors to build portfolios consisting of "all index" or "all active" funds, and that both types of funds could be included in a diversified portfolio.

"The point of the report is to give the facts to investors and fiduciaries and let them make their own decisions; we're not trying to advocate one style over another," said Dash.


Standard & Poor's first scorecard was released in November 2002 and was later followed by a recap of 2002. More information about the scorecard is available on the S&P website.