Keynote SpeechThe Superbowl of Indexing IIIPalm Springs, CaliforniaDecember 7, 1998
ON FEBRUARY 16, 1993, in the weekly Investment Perspectives bulletin published by Morgan Stanley, the author of the Strategy section began his analysis with this headline: “I Hear the Death Rattle of Indexing.”
It was based, reasonably enough I suppose, on the fact that after a decade of generally miserable performance relative to the market indexes by money managers during the 1980s, their “stock picking paid off well in 1991–1992,” and would continue to pay off during the remainder of the decade. During that two-year period, most managers were finally beating “the market.” The average mutual fund, for example, had risen at a 22% annual rate, compared to 18% for the S&P 500 Index. The strategist's forecast: “I think many active managers will outperform the popular indexes for most of the 1990s.” I salute the courage it takes to issue such a forecast—especially under an unequivocal, contentious headline proclaiming a “death rattle”—for in this business, sticking one's neck out with a forecast of future performance is a very risky endeavor. (Full disclosure requires me to acknowledge that I learned that lesson the hard way!)
Nonetheless, the forecast could scarcely have been worse. For the Standard & Poor's 500 Stock Index, while continuing to lag for the remainder of 1993, quickly moved ahead of the average fund manager, and has not only remained there, but has—almost ...