Indexing performed best in the long run

The equity stars have been in alignment for actively managed large-cap funds, with 56 percent of portfolios beating the Standard & Poor's 500 through mid-October, according to S&P.

Managers with the discretion to boost exposure to market leaders in energy, utilities and real estate have had an advantage in 2005 over funds that simply track the broad index. But maintaining that edge in the longer term remains a challenge, said Rosanne Pane, S&P's mutual-fund strategist.

"There are times when active funds can do better, such as when the market is declining. If active managers are in cash, they're obviously going to minimize their losses," Pane said.

"Secondly, if a certain sector starts to lead the market, and managers are already in that sector, and they're overweighted, they're going to do better."

Despite the success of large-cap managers through the first three quarters of this year, longer-term results show indexes consistently outperforming active funds.

The S&P 500 index has beaten 69.4 percent of actively managed large-cap funds in the past three years, and 63.6 percent in the past five years.

The same is true of indexes tracking small- and mid-cap stocks, both so far this year and over the longer term.

Small- and mid-cap portfolio managers have had a tough time beating their benchmarks in 2005, according to S&P.

At the end of September, the S&P MidCap 400 outperformed 72.1 percent of mid-cap funds, while the S&P SmallCap 600 beat 72.3 percent of small-cap funds, in keeping with three- and five-year trends.

Some investors interpret this kind of data as a reason to eschew actively managed funds in favor of the more passive indexing approach, either through traditional mutual funds or exchange-traded funds (ETF).

By owning the market, the reasoning goes, you're guaranteed market returns. Adding to their appeal, index funds and ETFs tend to have significantly lower expenses than their actively managed counterparts, which leaves more money for shareholders. Meanwhile, advocates of actively managed funds prefer to focus on the 30-some percent of portfolios that do beat their benchmarks over longer periods.

In many years, especially when the market has gyrated wildly up or down, indexing has proved a winning bet.

But when the market drifts sideways, or slightly down, as it has for much of 2005, the advantage seems to go to active managers, said Andrew Clark, a senior research analyst at Lipper, which recently examined this issue.