Growth Funds Beat Benchmarks in First Quarter

Actively managed growth funds convincingly beat their corresponding Standard & Poor's indices during the first quarter of 2006, while value-oriented funds generally lagged their benchmarks, according to data released today by Standard & Poor's.

The Standard & Poor's Indices Versus Active Funds Scorecard (SPIVA) report showed that the S&P 500/Citigroup Growth Index managed to outperform only 29.9% of actively managed large-cap growth funds for the quarter. Moreover, the S&P MidCap 400/Citigroup Growth Index and the S&P SmallCap 600/Citigroup Growth Index beat 21.9% and 31.2% of actively managed mid-cap and small-cap growth funds, respectively.

By comparison, the S&P 500/Citigroup Value index beat 80.3% of actively managed large-cap value funds. Similarly, the S&P MidCap 400/Citigroup Value Index and the S&P SmallCap 600/Citigroup Value Index beat 87.5% and 88.8% of actively managed mid-cap and small-cap value funds, respectively.

Overall, actively managed mutual funds outperformed their relative Standard & Poor's benchmark indices in five of 11 general equity categories. One category ended the first quarter in a tie, while active funds trailed their indices in the remaining five categories.

Specifically, the SPIVA Scorecard showed that the S&P MidCap 400 index outperformed 51.5% of mid-cap funds during the first quarter, while the S&P SmallCap 600 index outperformed 64.2% of small-cap funds. Actively managed funds fared better in the large-cap category, with 52.3% of them outperforming the S&P 500 index.

"So far in 2006 actively managed large-cap funds, which can invest in foreign companies, have benefited from international markets outperforming the U.S. market," says Rosanne Pane, mutual fund strategist at Standard & Poor's. "Active funds also benefited from overweight positions in leading sectors such as real estate, telecom services, energy and materials."

Contrary to popular belief about the effectiveness of active management in the small-cap space, SPIVA found that active small-cap funds have had lower equal- and asset-weighted returns than the S&P SmallCap 600 index and its comparable growth and value sub-indices for the past three and five years. "The small-cap market is generally considered to be inefficient and favoring active fund management," says Srikant Dash, index strategist at Standard & Poor's. "Our results should provoke thought about the active versus passive issue in the small-cap space, particularly in the context of the large number of small-cap fund closings."

SPIVA also showed that longer-term results are consistent with past results of index outperformance. Over the past three years, the S&P 500 has outperformed 61.9% of large-cap funds, the S&P MidCap 400 has outperformed 77.4% of mid-cap funds, and the S&P SmallCap 600 has outperformed 75.9% of small-cap funds. Over the past five years, the S&P 500 has outperformed 67.1% of large-cap funds, the S&P MidCap 400 has outperformed 87.3% of mid-cap funds, and the S&P SmallCap 600 has outperformed 78.7% of small-cap funds.

The complete year-end SPIVA scorecard, as well as previous quarterly SPIVA reports, is available on www.spiva.standardandpoors.com.

Percentage of Active Funds Outperformed by Relative Benchmark

Contact Bob Keane with questions or comments at: bkeane@investmentadvisor.com.