Mutual Funds Fun Facts: There's Actually a Place for Actively Managed Funds

In this week's Motley Fool Answers, Alison Southwick and Robert Brokamp reveal some lesser-known facts about these pooled investment vehicles. In this segment, they play devil's advocate a bit: We just were reminded that index funds usually outperform actively managed funds, but, here, they consider some of the exceptions to that rule.

A full transcript follows the video

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This podcast was recorded on Oct. 4, 2016.

Alison Southwick:Which brings us to our fourth thing that you maybe didn't, but probably should, know about mutual funds, and that is that active management does have its role.

Robert Brokamp:Yeah. When you talk to people, there are people who are very hard-core index-fund people.

Southwick:They're called Bogleheads.

Brokamp:They're called Bogleheads -- named after Jack Bogle, the founder of Vanguard -- and they're big fans of Vanguard. But the interesting thing about this is that Vanguard has always had actively managed funds, even when Jack Bogle was running the company, and Vanguard puts out reports saying you can have active and what they would call passive or index funds in your portfolio. You just make sure that you use the right criteria for choosing your active funds. I think it makes sense. I own index funds and actively managed funds.

Why would you own actively managed funds? First of all, there are some categories where active managers tend to fare better, such as emerging-market stocks, and municipal and high-yield bonds. Costs are a big factor as well. If you find a good, active manager but then you focus on costs, and that's what Vanguard does, you can show that you can do pretty well with these active managers. And the bottom line is there are funds that do beat their benchmarks over the long term, and it's not a bad idea to have some money in those types of funds.

Personally, I like to look for funds that do something a little different. It might be that they take a little less risk than the overall market. It might be that they have a wider mandate. So instead of saying it's a fund that is just large-cap value, it can go into midcap or small cap. One great long-term fund isDodge & Cox Stock [Fund]. It's a U.S. stock fund, but up to 20% of its assets can be in international stocks, so their managers can say, "We mostly focus on U.S. stocks, but right now we're finding value in international stocks, so we can go there if we want." That has served is shareholders very well over the long term.

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