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TH,
I don't think you're missing anything. The small cap funds that do beat there benchmarks (small value fund vs. small value index) over time do this through passive, NOT active, strategies. For example, look at Ariel. Very low turnover, and very little style drift from value.
As Bogle says, it's all about the fees. The lower the expense ratios, the lower the turnover (the lower the transaction costs), and the better the fund is at protecting shareholder interests (staying away from soft dollars, etc.), the better chance it has at outperforming its peers.
I'd bet that the majority of the "active" funds out there that have excellent track records are in fact very passive. Examples: Dodge and Cox, Ariel, American Funds, Vanguard's active funds.
All index or passively managed funds (like Bridgeway's funds, or DFA funds) are in a sense managed. Someone, somewhere has to decide what is small, what is value, etc. DFA's funds are more pure value and more pure small cap. Their value funds are deeper value (lower P/B) than the S&P indexes or Russell Indexes. Just like the S&P 600 is smaller than a lot of "small cap funds".
Sorry about the vague reference about the regression earlier. Basically what is says is that when we account for the value exposure of a fund, the small exposure of a fund, and the market exposure of a fund, the extra umphh (or whatever you want to call it) that a manager and his research actually adds is almost negligable (sp), and in most cases not significant enough that we can say it is not zero (or that the manager adds virtually nothing). Whenever we see return numbers compare we should ask, "which stock, fund, or asset was riskier?", and did the risk account for the excess return.
I think the main difference b/w DFA funds (index funds, Bridgeway's funds, etc.) and actively managed funds is that the former believe that security selection/stock picking is pretty much worthless and a loser's game. What matters is your exposure to risks in the market (like small and value). The actively managed funds may want us to believe that they can identify underpriced securities (which will have higher returns than the rest of the asset class), while folks like DFA will say this or that group of stocks will have higher returns b/c they are riskier.
- Alec
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