As we close out 2014, the question of how well actively managed funds fared against their passively managed counterparts hovers in the background of much of the news about fund returns and portfolio management. Over the years, both camps have offered sound reasoning for focusing on one investment practice instead of the other. But they may perhaps both be right.

From the passive camp, we hear that it is nearly impossible for a fund to continually outpace its benchmark index, and the effort isn’t worthwhile. Not only do active fund managers have to pick the right blend of stocks or bonds, they must also compete against an index that is non-investable and doesn’t suffer from the drags of expenses or cash allocation. [Virtually all mutual funds must keep some cash on hand to meet potential redemptions, which in up markets can cause a fund to underperform its benchmark.] Lipper’s 2014 Quick Guide to Open-End Fund Expenses indicates the average actively managed front-end load/no-load fund must beat an average annual expense ratio of 1.10% just to break even.

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