NEW YORK Actively managed equity funds keep pace with stock indexes

The second quarter proves kind to managers of mutual funds.
NEW YORK (AP) -- The people who run actively managed equity funds have scored a coup this year, with many of them keeping pace with their benchmark stock indexes.
The managers of small-capitalization funds, which focus on smaller company stocks, are one example. Six out of 10 managers of actively managed small-cap funds beat their benchmark, the Standard & amp; Poor's SmallCap 600, during the second quarter, and nearly 70 percent are ahead for the year, according to a study by S & amp;P.
That is a welcome change for active fund managers, who have been criticized for underperforming in comparison with their more passive counterparts at index funds. Because index funds more closely mirror stock indexes, they require little management and have lower fees.
Actively managed funds have lagged behind their benchmarks over longer periods, in part because of higher expenses.
"Over the short term, like three months, active managers can outperform their benchmarks. ... It becomes difficult for an active manager to consistently outperform his benchmark," said Srikant Dash, one of the authors of S & amp;P's quarterly study called, "Standard & amp; Poor's Indices Versus Active Funds Scorecard."
Second-quarter returns
The S & amp;P SmallCap 600 had a second-quarter total return of 19.9 percent, including dividend payments by companies in the index. Actively managed small-cap funds on average fared better, posting a total return of 20.8 percent on an asset-weighted basis, a common industry calculation that gives more weight to funds with greater assets.
So far for the year, the S & amp;P SmallCap 600 has a return of 12.9 percent, while actively managed small-cap funds have a return of 15.2 percent.
Mid- and large-cap funds aren't doing as well, mirroring a trend on Wall Street in which smaller company stocks have been yielding many of the biggest returns. Smaller company stocks often fare better as the economy is beginning to recover; one reason is that during bear markets, investors looking for safety tend to overinvest in larger blue-chip companies.
In the second quarter, about 44 percent of the managers in charge of actively managed large- and mid-cap funds measured up or surpassed their benchmarks: the S & amp;P 500 index and the S & amp;P MidCap 400 index.
So far this year, nearly 60 percent of active mid-cap managers have outperformed, while 39 percent of active large-cap managers have.
Index funds promoted
Since the debut of index funds in the 1970s, they have been touted, most notably by low-cost fund leader The Vanguard Group, for being cheaper than actively managed funds and safer bets for investors who want to own a broad swath of the market, rather than trying to pick hot stocks or funds.
The rationale is, why should investors pay more for managed funds if they can't regularly beat the market?
And, over longer periods, the performance of actively managed funds points shows why managers have encountered much criticism. The S & amp;P 500 has surpassed 56.8 percent of large-cap funds over the last five years, while the S & amp;P MidCap 400 has beaten 92.7 percent of mid-cap funds and the S & amp;P SmallCap 600 has outrun 66.1 percent of small-cap funds, according to S & amp;P.
"This [underperformance] is caused by a couple of things. One, of course, is that stock selection skill doesn't hold out. The second is cost," Dash said.
A different view
Fund managers disagree and say their expertise is valuable to shareholders.
"We follow a philosophy and a process that we think over time will point to outperformance," said William Batcheller, portfolio manager of the Armada Equity Growth Fund. "It is a focus on stock picking and buying stocks for fundamental reasons. When you index ... you are not focused at all on valuation. You are buying a stock whether it is overpriced or underpriced. Our objective is to find underpriced stocks."
Armada Equity Growth, with a 10.7 percent return in the second quarter, underperformed compared with its benchmark, the S & amp;P 500. It also failed to stand up to other large-cap growth funds, which on average had a return of 14.2 percent.
But the fund outperformed the S & amp;P 500 from 1997 through 2000, the years of the last bull market.
From a fee standpoint, however, index funds clearly have the edge. Fees for these funds range between 0.25 percent and 0.5 percent.
Actively managed funds have higher fees, because managers must do more research and execute more trades. Expenses average about 1.4 percent, according to Eric Tyson's book "Mutual Funds for Dummies."
Armada Equity Growth has an expense ratio of 1.2 percent.