Actively Managed Funds Struggle Amid Crisis

Here's a good article from the Wall Street Journal. I've copied the article in case the link stops working. The link is at the bottom.


By Paulette Miniter | SmartMoney

If you ever wondered whether it pays to buy an actively managed mutual fund, this year's dismal results don't help the industry's cause.

Fidelity's 2008 is a case in point. Among the largest U.S. mutual fund companies and 401(k) providers, Fidelity is primarily an actively managed fund shop. But its year-to-date performance for U.S. stock funds is slightly below that of Vanguard's, which is known for its inexpensive indexed-based funds.

The average Fidelity U.S. stock fund was down 34% through Monday, compared to -32% for Vanguard, according to Lipper. That's about where the overall stock market is, as well.

Fund companies always like to remind us not to overemphasize short-term results. But the numbers are a stark example of where active stock-picking can lead a portfolio. This is especially relevant if you're paying extra for the active management. Although Fidelity sells many good low-cost funds, on average its diversified U.S. stock funds have an expense ratio of 1.24% compared with 0.20% for Vanguard, according to Morningstar. For all their equity funds, the averages are 1.32% for Fidelity and 0.20% for Vanguard.

The question now is, should you stick with an active fund manager who made clear missteps this year but has done well in the past?

"It's not that these managers who have done well for a number of years just turned stupid all of the sudden," says Tim Courtney, chief investment officer at Burns Advisory, an independent registered advisor firm in Oklahoma City, who is advising clients to try and stick it out for when the market rebounds.

He points to Bill Miller, of Legg Mason Value, who had beat the S&P 500 for 15 years straight until a couple of years ago. Miller's fund, which has an expense ratio of 1.68% for primary class shares, is down a whopping 48% this year. "We'd expect it to lag badly at times, due to Miller's bold approach," Morningstar analyst Greg Carlson has said.

"There is something strange about the market we're in. It's leading a lot of actively managed funds to make wrong decisions, and it's making their funds look bad in the short run," Courtney says.

Another example is Fidelity Magellan, which although actively managed is cheap with a 0.72% expense ratio. It's down more than 40% this year, worse than its peers and the S&P 500. Last year, though, it rose 19% under the same manager, Harry Lange. What happened? One of its top recent holdings was American International Group, which is down to about $2 a share after starting the year at $55. The feds had to bail out AIG amid the heat of the credit crisis. However, the fund has also taken big hits on companies outside the finance sector, including from its biggest holdings, Nokia and Corning.

Despite the bad showing year to date, Morningstar analyst Chris Davis still thinks Lange will "eventually reproduce his past success."

"If the fund's dramatic underperformance shows anything, it's that Lange is no index hugger," Davis says. "That willingness to be different has backfired in a dramatic way this year, but it's been Lange's ticket to success over the long haul."

OCTOBER 22, 2008, 3:53 P.M. ET
Source: Wall Street Journal, http://online.wsj.com/article/SB122470413376959381.html