“Autopilot is looking pretty good these days,” writes Danny Hakim in today’s New York Times.

“In the mutual fund industry, most money managers try to beat the market by picking the right securities. But in these bearish times, index funds that simply mimic the performance of popular stock and bond indexes are taking the lead.”

“Not only are index funds outperforming actively managed funds, but the Vanguard Group, which invented the index mutual fund in the 1970’s, has reclaimed its title as the most popular, in terms of combined sales of stock and bond funds. Four of the nation’s 12 best-selling funds are Vanguard index funds, according to the Financial Research Corporation, which tracks money flows into mutual funds.”

“People once obsessed with finding the next Yahoo or sure-fire Internet mutual fund have tamed their inner investor. They are looking to less turbocharged index funds, and increasingly to the relative safety of bonds. In July, stock funds had their first month of net withdrawals since March, according to a new projection from Lipper Inc., a fund tracking firm.”

“Investors flocked to index funds in the middle and late 1990’s as stock indexes soared and index funds tended to beat actively managed funds, after trailing in the early 90’s. Vanguard, the nation’s second-largest fund management firm behind Fidelity Investments, became the leader in new fund sales in the late 1990’s. But last year, it relinquished its sales title to Janus Capital of Denver. Janus’s managers tried aggressively to beat the market by making bets on stocks like Nokia.”

“But over the last year, investors have been fleeing Janus as its funds have plummeted, and the assets of the company have plunged from $330 billion in March 2000 to $200 billion at the end of July — a staggering decline of almost 40 percent that has sliced away at the profits of its parent company, Stilwell Financial, a Kansas financial holding company.”

“The relative merits of the index fund versus the actively managed fund are a matter of continuing debate in the mutual fund industry, a man versus computer struggle. For some investors, the idea of buying an index fund seems like giving up. And, in a swooning market, index funds might not have obvious appeal. Why would anyone want to be invested in a fund that is programmed to follow the Standard & Poor’s 500 off a cliff?”

“One reason is that many of the fund managers who are paid to beat the market are doing even worse than the S.& P. 500. For the first seven months of the year, the average diversified domestic stock index fund was down 8.4 percent. Not so great. But the average diversified fund that was actively managed lost 10.3 percent, according to Morningstar Inc., a Chicago fund-tracking firm.”