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Actively Managed Funds Have Little Place in a Portfolio: Bogle

Wednesday, 16 Jan 2013 | 1:08 PM ET
Vanguard's Bogle Makes Case for Index Funds
Jack Bogle, The Vanguard Group, explains why the index over the actively managed fund is a better option for investors.

Mutual funds that are actively managed tend to lag the broader stock market because they have grown too large and have too many costs, Jack Bogle, co-founder of Vanguard and father of the index fund, told CNBC's "Closing Bell" on Monday.

"What we're seeing now is the real triumph of indexing," Bogle said. Over the past six years about $650 billion flowed into index funds with most going into the broad stock market and bond market funds, he said.

ETFs tend to have lower fees than mutual funds and offer better returns. Nearly two-thirds of large-cap active managers lagged the S&P 500 index, according to data from S&P Capital IQ.

"Active fund managers lag the market because they have to," Bogle said. They've gotten so large they can't outperform each other, he added.

"So they turn out to be average before costs and lower-than-average after costs," he said. "It's the relentless rules of arithmetic."

Bogle suggested that while some fund managers do outperform the market, it's hard to pick winning managers and investors should still stick with broad index funds.

(Read More: 2013 Another Big Year for ETFs?)

Two Active Fund Managers Make the Case Against Index Funds
Why fundamentals trump technical and market momentum, with Brett Gallagher, Artio Global Investors, and Michael Crofton, Philadelphia Trust Company.

In a separate interview, Michael Crofton, president of fund manager Philadelphia Trust Co., told CNBC that actively managed funds remain an important part of an investor's portfolio.

Unlike index funds, active funds manage risk, Crofton said. "If a client wants his risk managed as well as his return managed, then there's only one way to do it and that's through active management," he said.

And, according to Crofton, if you adjust mutual-fund returns to account for risk, fewer active managers would underperform the broader indices.

"Clients want to participate in the market but they don't want the risk of the market," Crofton said.

*Correction: An earlier headline said that mutual funds have little place in a portfolio. Bogle contends that actively managed equity funds have little place in a portfolio.

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