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Why actively managed funds aren’t deadPublished:?Sept 8, 2014 12:46 p.m. ET - MarketWatch??By HYPERLINK "" \o "Chuck Jaffe" CHUCKJAFFECOLUMNIST Whenever something is “new and improved,” it is seen as the death knell for whatever came before, because the original idea is now old and downgraded.Thus, a case can be made that smartphones, tablets, and laptops have killed the desktop computer, or that satellite radio has killed traditional terrestrial stations.The argument is interesting, but there are plenty of people happily using the old methods.That’s been important to remember lately as fund experts (again) have been making the case that indexing has killed active management. It’s not a new argument. Some of that buzz has been kicked up as the Vanguard Group — the world’s leading fund company best known for its index offerings — approaches the $3 trillion mark in assets; the same kind of case was being made at least $2 trillion ago and at various points along the way.The rest of the renewed buzz has been generated by the media, where there has been no shortage of strong cases, from a variety of sources, ranging from MarketWatch interview with Chris Philips, one of the passive pioneers at Vanguard, to investment legend Charles Ellis suggesting in the Financial Analysts Journal that “performance investing … is no longer a game worth playing.”All told, index funds and exchange-traded portfolios now account for nearly 30% of all money in funds; it was one-third that level in 2000.That kind of growth and the inherent common-sense of index investing — plus the gazillion examples of how paying a money manager to attempt to beat the market is a folly — leads to all of the “active management is dead” talk.But just as some people keep working on desktops or start their car and tune in to AM radio, so do actively managed funds still serve a purpose for a lot of investors.Flawed? Sure.Dead? Not by a longshot.While more than two-thirds of the $16 trillion invested in mutual funds is actively managed, there’s not really much arguing the active-versus-passive strategy case by now. Even active managers acknowledge that an index fund — which passively tracks a benchmark and tries to keep costs to a minimum — typically is a better bet long-term than a fund in the same asset category where an average manager tries to do better than the market yardstick.Simply put, most active managers — saddled with significantly higher costs — can’t top the index standard over time, even if they are capable of beating it in short-term periods.To achieve the same results, an actively managed fund typically must overcome higher expenses, meaning it must generate better returns than the index just to hope to match the performance of the benchmark.Index funds, meanwhile, sacrifice the chance to “beat the market” and are doomed to decline whenever their index is troubled.Morningstar’s John Rekenthaler noted recently that Vanguard’s actively managed funds actually have outperformed their more-storied index peers, although the active results may have been helped by the fact that Vanguard has closed some disappointing performers in recent years.In short, even if “indexing is better” is now seen as the rule, there are lots of exceptions.Moreover, even if all of the evidence points towards index funds being the “better” investment, the proof isn’t so much in the studies, but in an investor’s portfolio.Talk to financial advisers who espouse the benefits of passive investing, and you may also find that they are actively managing portfolios of index funds, trading the funds based on market trends or intuitions.There’s no guarantee that the guy managing a portfolio of “better funds” — and adding an additional layer of costs in the process — actually is improving performance. In the vein of “new and improved,” that’s like saying a nail gun is better than a hammer, which stops being true when you shoot yourself in the foot with it.Countless studies have shown that investors typically get the worst out of mutual fund performance, buying in only after there has been strong performance and selling out when there’s a frightening downturn, meaning that the funds are bought at a high and sold near a low.You can bumble your way to that strategy in index funds every bit as much as with actively-managed funds.So while there’s a clear case to be made that the index fund is the biggest best ride in the financial amusement park, that doesn’t mean you won’t get sick if you’re not emotionally prepared to be strapped in to the rollercoaster’s ups and downs.The right strategy, therefore, is less about active or passive management than finding something comfortable, limiting your activity level trading whatever funds you own, and focusing on the total portfolio and progress toward your goals rather than whether all of the individual pieces beat their respective benchmark.It matters less that something is the newest and most improved, and more that you are satisfied with what you’re using. When you’re no longer satisfied, that’s when it’s time for an upgrade. ................
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