July 10, 2003 — The majority of actively managed small-cap mutual funds beat their benchmark, the S&P SmallCap 600, in the second quarter of 2003, according to Standard & Poor’s data.

Specifically, 59.6% of active small-cap funds came out ahead of the index. However, actively managed mid-cap and large-cap funds did not do as well: 56.2% of active large-cap funds lost to the S&P 500, while 56.6% of actively managed mid-cap funds lost to the S&P MidCap 400 index.

As the S&P 500 index notched its best quarterly performance since the last quarter of 1998, all nine general equity styles and eight equity sectors tracked by Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA) showed double-digit positive returns both on an asset- and equal-weighted basis.

Actively managed large-, mid-, and small-cap growth funds turned in a notable second quarter, outperforming their relevant indices by 70.7%, 64.7%, and 81.3% respectively. However, the reverse was true for value funds, Standard & Poor’s data showed.

“If you look back at the 1990 recession, one of the key indicators that suggested we were emerging out of the recession was that growth funds were outperforming value and blend,” noted Phil Edwards, managing director of funds research at Standard & Poor’s. “This is exactly what the market is witnessing today. Investors are anticipating the start of a recovery, they are becoming more optimistic about future earnings announcements, and are starting to shift assets into equities.”

Over last five years, the S&P 500 has beaten 56.8% of large-cap funds, the S&P MidCap 400 has beaten 92.7% of mid-cap funds, and the S&P SmallCap 600 has beaten 66.1% of small-cap funds. Similarly, for the three-year term, 56.3% of large-cap funds, 72.8% of mid-cap funds, and 70.4% of small-cap funds fared worse than their benchmark.

Moreover, a majority of actively managed funds have fared worse than the indexes in eight out of nine style boxes over three- and five-year horizons. “Active funds have done relatively well so far this year, but our analysis shows that there is a lot more clarity over the medium- to long-term with the scales tipped in favor of indexing,” said Srikant Dash, a Standard & Poor’s equity-index analyst.

Among sector funds, active managers beat indices in five out of eight sectors in the last quarter. This is also true for the five-year horizon as well, suggesting that active sector fund managers have added value respective to their sector benchmarks. In general, REITs and utilities are sectors where active managers had the most trouble beating indices over different time horizons.

After accounting for mergers and liquidations, the general active equity fund universe has grown by 3.3% in the last 12 months, while the active sector fund universe has shrunk by 7.3%. For the complete second quarter SPIVA scorecard, visitwww.standardandpoors.com.