Back in 1970, Edwin Starr released a recording of the song “War.” The notable lyrics, “war/what is it good for/ absolutely nothing,” have been quoted often in the 40 years since. However, contrary to Starr’s lines, it turns out there may be one thing that war is indeed good for: the stock market.
Last year was a year of surprises. Sure the Chicago Cubs won the World Series for the first time in 108 years, Brad Pitt and Angelina Jolie announced that they are dissolving their marriage, but I’m talking about more interesting topics, like those that impacted the capital markets.
I come to praise active management, not to bury it. Active management has been much maligned recently, including in this column, because of the increasing dominance of index investing over active stock picking.
Indeed, according to estimates from Morningstar, actively managed U.S. stock funds have seen outflows of over $185 billion so far this year. By comparison, U.S. stock market index funds have attracted almost $125 billion in new assets. What’s driving this disparity?
The index fund recently celebrated its 40th birthday. The Vanguard 500 Index Fund, the very first indexed mutual fund, began on Aug. 31, 1976. That might not seem like such a big deal, but consider that during a typical 10-year period, roughly half of all stock mutual funds close their doors. Merely surviving for 40 years is quite a feat, but the fact that the Vanguard 500 Index Fund is now among the largest mutual funds in the world makes it all the more impressive.
In fact, of the 25 largest mutual funds, all but 10 are index funds. Of the 10 non-index funds on the list, only six are actively managed.