Managers vs. Indexes - Q2 is a Draw, but Long-Term Results Favor Benchmarks IndexFunds.com Staff July 10, 2003

It was a dead heat in the second quarter as active managers beat the relevant S&P index in four out of the nine style boxes, but lost to the index in four other categories. One style box, mid-cap blend, showed a near tie.

Percentage of General Equity Funds Outperformed by Index

Fund Category	Comparison Index	Q2 2003	1-year	3-year	5-year
All Domestic	S&P SuperComposite 1500	43.82	67.16	55.33	55.03
All Large Cap	S&P 500	56.19	72.04	56.33	56.81
All Mid Cap	S&P MidCap 400	56.60	51.98	72.79	92.67
All Small Cap	S&P SmallCap 600	41.43	41.57	70.44	66.14
Large Cap Growth	S&P/ BARRA 500 Growth	29.33	83.75	60.76	52.58
Large Cap Blend	S&P 500	57.80	69.73	58.04	57.18
Large Cap Value	S&P/ BARRA 500 Value	82.13	56.94	41.91	53.65
Mid Cap Growth	S&P/ BARRA MidCap 400 Growth	35.29	64.14	83.93	96.00
Mid Cap Blend	S&P MidCap 400	50.62	53.66	69.86	85.29
Mid Cap Value	S&P/ BARRA MidCap 400 Value	66.67	38.24	78.16	94.87
Small Cap Growth	S&P/ BARRA 600 SmallCap Growth	18.75	68.98	87.60	72.51
Small Cap Blend	S&P SmallCap 600	45.76	40.16	70.67	60.96
Small Cap Value	S&P/ BARRA 600 SmallCap Value	68.32	14.84	56.08	45.79

Source: Standard & Poor's. For periods ending June 30, 2003. Outperformance is based upon equal- weighted fund counts.

Over last five years, the S&P 500 has beaten 56.8% of large cap funds, the S&P MidCap 400 has beaten 92.7% of mid-cap funds, and the S&P SmallCap 600 has beaten 66.1% of small-cap funds. Similarly, for the three-year term, 56.3% of large-cap funds, 72.8% of mid-cap funds, and 70.4% of small-cap funds fared worse than their benchmark, according to S&P.

Stocks enjoyed strong gains across the board in the second quarter, with the S&P 500 posting its best quarterly performance since the last quarter of 1998, and all nine general equity styles showed double-digit positive returns. Indexing is thought by many to work best in a rising market, yet the results from the second quarter indicate a tie between managers and benchmarks.

"Active funds have done relatively well so far this year, but our analysis shows that there is a lot more clarity over the medium- to long-term with the scales tipped in favor of indexing," said Srikant Dash, equity index analyst at Standard & Poor's. "It follows then that investors choosing between index-based investments and actively managed funds need to consider not only the higher costs and fees associated with active funds, but also the time horizon for the investment. Over time, it becomes more difficult to guess right on a particular fund or manager, so most longer term investors should also consider exposure to index funds in their portfolios."

S&P adjusts for survivorship bias in its study methodology, since many funds might be liquidated or merged during a period of study. For someone making an investment decision at the beginning of the period, these funds are part of the opportunity set, and should therefore be counted.

After accounting for mergers and liquidations, the general active equity fund universe has grown by 3.3% in the last 12 months, while the active sector fund universe has shrunk by 7.3%.