​Can investors pick winning funds? Chances are, no

In the perpetual debate over "active" versus "passive" investment, Vanguard's Jack Bogle and other proponents of indexing are likely feeling fairly validated at the moment.

That's because new research has found that two-thirds of active large-cap managers failed to beat the market in 2015. The results are even worse for small-cap managers, with more than 72 percent failing to outperform the S&P SmallCap 600 index, according to S&P Dow Jones Indices' latest SPIVA U.S. scorecard. Almost 57 percent of mid-cap managers underperformed the S&P MidCap 400.

Last year was a tough year for making money in the stock market, of course. While the Standard & Poor's 500 index fell about 1 percent in 2015, it included market gyrations that left some Americans fearful about the security of their retirement funds. Indeed, it was the type of market in which investors depend on mutual fund managers to protect them from financial losses.

Yet if most active managers are failing to keep up with the market, especially in times of volatility, that raises the question of what exactly investors are paying for.

"Overall it was rather disappointing for equity managers, I have to say," said Aye Soe, senior director of index research and design at S&P Dow Jones Indices. The volatile market "was precisely when we need active manages to do better on a relative basis."

Active managers say the report doesn't reflect how investors allocate their funds, and may lead to some misconceptions about the factors to consider when choosing funds.

"We feel that comparing a benchmark index to the aggregate of all active managers as a whole is probably not the right way to do it," said Stephen Deschenes, head of product development at Capital Group's American Funds. "Nobody would invest in all active managers, and active management is 70 percent of the market, so some will underperform the market net of fees. But it doesn't mean you can't find a cohort of select active managers who will do better than the benchmark and do it consistently."

Investors are better off picking a long-term strategy and sticking with it, rather than chasing returns and switching between styles or asset managers, Deschenes advises. His advice: Search for active managers whose fees are in the lowest quartile and who are invested in their own funds.

Investment in the fund illustrates "a higher degree of manager ownership, and that identifies that long-term alignment with shareholder values," he said.

Still, investors are increasingly shifting their money to passive funds, which are designed to mirror indices. While index funds won't produce higher returns than the underlying index, advocates say that such strategies at least guard investors against getting burned by high fees and underperformance. Active funds charge about 74 basis points, compared with 43 basis points for passive exchange-traded funds, or ETFs.

There are some glimmers of hope for investors who prefer to stick with active management, however. First of all, large-cap managers actually did better last year than in 2014, when a whopping 84 percent of fund managers failed to beat the market.

Second, a majority of active managers in two investing styles outperformed the market in 2015. That approach? Mid-cap and small-cap value investing, the time-honored strategy most closely identified with Warren Buffett. The strategy focuses on finding companies that are undervalued by the stock market.

"What we saw was these value managers, even in tough periods, aren't down as much," Soe said. "Value-style investing is something where you need to have patience because you are acting on your investment conviction that the company is worth more than what it's trading at."

More than three-quarters of mid-cap value funds beat their benchmark index, while more than half of small-cap value managers exceeded their benchmark, the report found. Large-cap value investors had a slightly tougher year, with only about 40 percent beating their benchmark index.

While many managers across all investment styles are providing excess returns to their investors, the question is whether they can repeat that feat year after year. To that point, Soe says she's working on research to track those managers. Her bet, she added, "is that they cannot do it."