Index Bonds Funds Beat Active Funds

We have more evidence that that Active Managers are unable to deliver results that are greater than the index against which they compare their performance. The Wall Street Journal weekend edition (August 22-23, 2009) referenced a study by Standard and Poor’s which indicates that index returns beat actively managed fund returns in all 13 fixed income categories over one and three years and in 11 of 13 categories over five years.

This is a bit surprising. Given the nature of bond investments, one might expect bond fund managers would be able to at least deliver the index. Frankly, they could do that if they did nothing. Instead their efforts to generate results greater than the index actually backfired.

The result is not just performance below the index. After management expenses, the results are ever worse. The average internal fund expense for a bond fund is 1.1% according to Lipper. So, the average actively managed bond underperformed the index by this additional amount.

Investors are wise to use no load passively managed funds for the fixed income portion of their portfolios. Another option would be to use individual bonds. However, for most investors, this will not provide sufficient diversification.