Is it worth it to pay a stock picker when index mutual funds are so cheap?
More investors are saying no, and billions of dollars are jumping onto the index-fund bandwagon by the month. Billions are leaving actively managed mutual funds at the same time. It was against that backdrop that several high-profile stock pickers made their case at the Morningstar Investment Conference in Chicago this week. Two of the conference’s main discussion panels addressed whether stock picking is dead, as Morningstar released a report showing that the majority of actively managed stock funds fall short of index-fund peers.
“Active management has lost its voice a little bit, and we want people to remember what it’s about,” said Rob Lovelace, president of Capital Research and Management and a portfolio manager at American Funds, the industry’s third-largest fund family. American Funds has been an exception among actively managed funds and has drawn new investment over the last year.
“The debate isn’t active versus passive,” he said. “Our goals are all the same.”
Index funds and actively managed funds can be potential complements, rather than just an either/or proposition, stock pickers say. The benefits of index stock funds are widely appreciated: They charge an average fee of $11 per $10,000, versus $86 for actively managed stock funds, and lower costs mean investors keep more of the returns.
Stock pickers say the difficulty for them is that they typically best demonstrate their worth when the market tumbles — a rarity since the stock market has roughly tripled since hitting its bottom in early 2009. In a downturn, active managers say they can avoid the worst-performing stocks and help cushion the blow of a bear market.
Of course, actively managed funds didn’t do so well in 2008. That’s because the financial crisis brought down all sectors of the stock market together, along with economies around the world. That makes it an exception, Lovelace said. In 10 of the last 12 bear markets, he said American Funds did better than index funds. In 2000, for example, American Funds’ Growth Fund of America returned 7.5 percent, when the Standard & Poor’s 500 index fell 9.1 percent.
The hope is that by blunting the pain of down markets, actively managed funds can help investors resist the temptation to abandon stocks and sell low. That would help them lock in better returns over the long term.
To be sure, most actively managed funds have produced lower returns over the past decade than index funds. That may be because many are built very similarly to index funds, and the only difference between these “closet indexers” and index funds is their higher fees, said Diana Strandberg, director of international equity for Dodge & Cox, which runs actively managed funds
That’s why even stock pickers are embracing the focus on low fees that’s sweeping the mutual-fund industry.
Lovelace suggested investors look not only for funds with low fees and strong track records but also those in which the managers invest their own money in the fund.
