IT'S ALL IN THE MIX

For years, smart investors could count on index funds outperforming actively managed funds, especially over the long term. But index funds have lost some luster. For the first time since academics began tracking the two investment methods, more than half of managed funds performed better than the market in 2000.

Should you move from indexed to managed funds? Not necessarily, but consider a new retail option that institutional investors have used for decades: indexing and active management together, within one fund.

Combo funds help solve problems both fund types face, explains Scott Budde, TIAA-CREF director of equity portfolio analytics. Active managers operate under many constraints; for instance, when investors deposit large amounts of money, it must be invested immediately, even in the absence of good buying opportunities. And when investors want to withdraw, the manager has to divest enough to come up with the cash, favorable selling conditions or no.

Add an index fund to the mix, and it can handle this cash flow. Cash can be parked in or withdrawn from the index side until a good stock deal comes along, Budde says. This approach eliminates cash drag and allows such funds to be 99.5 percent invested.

Combining passive and active management in one fund creates a compelling strategy. Only time will tell if it’s a successful one.