Are index funds 'positively un-American?'

The age old debate between active and passive management took an odd, patriotic turn at the Investment Company Institute General Membership Meeting on Thursday. “Index investing is positively un-American,” said Alan Reid, CEO of Forward Management LLC. “What you're saying is 'I want to be just a little bit less than average.'” Mr. Reids' “little bit less than average” zinger was directed at the relatively small expenses investors pay to access index funds. Not surprisingly, the boss of the second largest provider of exchange-traded funds didn't take the barb lightly. “With active management,” said Scott Powers, CEO of State Street Global Advisors, “you're going to be way below average 70% of the time.” Actually, the State Street executive was being a bit generous toward active management. Only 15% of actively managed large-cap equity funds, for example, outperformed the S&P 500 over the three-years ending at 2013, according to Standard & Poor's. Mr. Powers did say there was still a place for active management though. “There have been periods where active management has underperformed, but that's cyclical,” he said. “The animal spirit does return to the market pretty quickly. The biggest challenge with active management is patience.” Still, Mr. Powers prefers index funds for the majority of a portfolio. “Indexes, after costs, are probably the most effective way to manage the core of a portfolio,” he said.