Bank of America Corp (BAC), MBIA Inc. (MBI), American International Group Inc (AIG): Why Active Management Isn’t as Dumb as You Think

Yet by 2012, Bank of America Corp (NYSE:BAC) had recovered, doubling in value with help from capital financing courtesy of Warren Buffett and rising prospects in the banking sector. Meanwhile, American International Group Inc (NYSE:AIG) continued its strategy of divesting non-core assets and getting out from under government control. Fairholme’s return more than doubled the S&P in 2012. More recently, MBIA Inc. (NYSE:MBI)’s settlement with Bank of America Corp (NYSE:BAC) sent shares soaring, allowing Berkowitz to sell out at a large profit.

Admittedly, 2011’s massive underperformance did a lot to undermine Fairholme’s longer-term track record. The fund’s five-year performance now just barely beats out the average for the category. Yet with the rule applying even in an extreme situation, you can more easily see how a fund that just pokes down into the bottom half in performance one year could still put together an impressive track record over time.

Be careful, but don’t panic
One thing is true: Higher-cost mutual funds have a greater burden to overcome in producing after-cost returns for their shareholders. That’s why in the long run, many index funds beat out actively managed funds. But if you decide passive investing is for you, make sure you do it for the right reasons — not just because a fund you own didn’t manage to top the performance list every single year you owned it.

The article Why Active Management Isn’t as Dumb as You Think originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns shares of Fairholme Fund and warrants on AIG and Bank of America. The Motley Fool recommends AIG and Bank of America. The Motley Fool owns shares of AIG and Bank of America and has the following options: long January 2014 $25 calls on AIG.

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