“There is nothing novel about the index versus active debate. It has been a contentious subject for decades, and there are strong opinions on both sides,” S&P Indices wrote in its 2011 year-end “scorecard” that measures the performance of active fund managers against their relevant benchmark.
“The only consistent data point we have observed over a five-year horizon is that a majority of active equity and bond managers in most categories lag comparable benchmark indices,” S&P concluded.
Standerfer points out that indices, as well as peer performance, put the pressure on active fund managers to produce results.
“Outside of professional sports, I’m not sure there is any other industry that generates such objective and continuous measurements. And even in sports, there is no equivalent of a ‘passive benchmark.’ If a player is struggling, teams do not have the option to replace that player with a benchmark that guarantees them the averaged production of every player at that position,” he wrote.
Investors can buy a portfolio of index funds or ETFs and “have a good chance to outperform not just a few, but the majority of mutual and hedge fund managers,” Standerfer said.