Are fund managers worth their pay?

Large-cap value funds

Because they thrive on beaten-down stocks, value investors should do better in a down market than growth types. (Value stocks are those trading below what value investors see as their real worth.)

So, following the same procedures as outlined above but substituting large-cap value for large growth, I compiled a list of 120 managed large-cap value funds. Although the results are nothing to shout about, the value managers did better than the growth managers. They lost 37%, on average, beating the 40% loss of the iShares S&P 500 Value Index ETF (IVE).

However, the results were better than the numbers suggest. In this case, 91 managed funds beat the value ETF's return versus only 29 that fell short.

Copley (COPLX), down 16%, significantly outperformed the large-value category. Cutler Equity (CALEX) and ING Corporate Leaders (LEXCX), both down 29%, came next.

Small-cap growth funds

Since fewer investors know about them, and fewer analysts cover them, a fund manager's research should make a bigger difference for small stocks than for larger stocks. If that's the case, small-cap managers have a better chance of outperforming.

Alas, small-cap growth managers didn't come through in 2008. Using selection procedures similar to those described for large caps, my list of 116 managed small-cap growth funds averaged a 39% loss versus a 34% loss for the iShares S&P 600 SmallCap Growth ETF (IJT) and a 35% loss for the Russell 2000 (RUT) small-stock index. Only 29 managed funds beat the Russell index.

Hancock Horizon Burkenroad A (HHBUX), down 25%, and FMA Small Company (FMACX), down 28%, did the best.

Small-cap value funds

A check of small-cap managed value funds told the same story. The 54 funds that I found lost 32%, on average, versus a 30% loss for the iShares S&P SmallCap 600 Value Index ETF (IJS). Only 21 funds outperformed the value index.

Perkins Small Cap Value (JSIVX), a fund catering to institutional investors, down 22%, and Artisan Small Cap Value (ARTVX), down 24%, did the best.

I also checked managed funds specializing in the financial services, regional banking, health care, biotech and energy sectors with similar results.

I doubt that academics would consider my testing procedure rigorous. Since I arbitrarily set my selection requirements, a slight change might have listed different funds. Nevertheless, it's hard to avoid the conclusion that the fees required to hire a fund manager, rather than simply tracking an index, might often be better spent elsewhere.

That makes a careful look at the funds you own critical this year. Is your manager earning his pay?

At the time of publication, Harry Domash did not own or control shares of any fund mentioned in this column.

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