MARKET BUZZ
Funds' Passive vs. Aggressive Behavior
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Two close observers of mutual fund performance argued last week that people who invest in actively managed funds do much better than those who buy the market indexes.
James Lowell published a short piece titled "The Myth of Indexing" in the April edition of his independent newsletter, Fidelity Investor. He contended that the long-touted advantages of index funds -- tax efficiency, low costs, long-term performance -- pale when measured against superior active management. He noted that $10,000 invested in the Standard & Poor's 500-stock index through an index fund in 1963 would be worth $800,000 today. By comparison, the same $10,000 planted in the Fidelity Magellan fund over the same period (Magellan was launched in 1963) would have grown to $16.5 million. Of course, Magellan -- run for a long period by the legendary Peter Lynch -- is an extraordinary fund, and not many others have performed on par with it.
In the April issue of the Independent Adviser for Vanguard Investors, Daniel P. Wiener looked at how index investments and managed funds did in the year after the S&P plunged 3.5 percent or more in a single day. He used this measure in the belief that one-day tumbles are good buying opportunities for contrarian investors. "Huge one-day declines are . . . often caused by overzealous, nervous sellers who . . . eventually are found to be misguided in their worries," Wiener wrote. Over the past 24 years, there were 22 days when the Vanguard 500 Index fund sank 3.5 percent or more. Over the next year, Wiener found, the fund yielded on average 16.3 percent.
Several of Vanguard's managed funds, including Health, Energy, Windsor, PRIMECAP, Morgan Growth and Windsor II, did better. Health averaged a return of 24.5 percent in the 12 months after the index fell at least 3.5 percent. Energy gained 20.1 percent; Windsor 18.9 percent; PRIMECAP 17.8 percent. Morgan Growth and Windsor II both rose 17.1 percent.
-- Steven E. Levingston
