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More important than the active vs passive is getting the asset allocation right IMHO.
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Exactly right. 90+% of returns are derived from the AA decision alone. Also, costs matter.
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Harvard University's endowment allocation to US equities has shrunk from 80% (1980) to 12% (this last year).
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What is your point here? That US equities are no longer desirable?
Chances are the switch has been made partially because there are more sub-asset classes to invest in now that weren't readily available in the 80s, or those 'geniuses' are engaging in market timing. If that is the case, I urge you to compare Harvard to Yale, whose asset manager is a hard-core buy and hold proponent and has done extremely well.
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Not surprising that indexing hasn't worked as well recently since the traditional indexing principles are weighted towards large caps which haven't done as well recently.
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Sorry, I'm going to continue to pick on you. MOST indexes are indeed cap-weighted, which buys stocks according to their market weight. There is no evidence whatsoever to say indexing hasn't worked well. There are index funds which cover broad markets, sub-assets, and even distinct sectors/regions. For example, my small-cap value index fund has no large caps, but is still cap weighted in the small-cap space.
Index returns reflect the market, so a statement such as 'indexing hasn't worked well' is really saying the 'market hasn't been well'. No kidding.
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I know Fairholme has recently reopened.
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Why do funds reopen? Ask yourself that question carefully before you proceed in investing in high-cost funds. A hint: Perhaps assets under management have tanked due to redemptions and the fund manager needs another ferrari...
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managed funds have the flexibility to reallocate their portfolio to reflect new market conditions
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So if your risk aversion says you need to hold cash/bonds, just hold cash/bonds in the right place and avoid the extra expense of the managed fund. You are betting that your manager has insight the rest of the market does not. Holding that cash in down times does cushion the fund against steeper losses AT THE COST of missing out on gains when the market recovers. If you want to decrease volatility, don't market time, just hold an appropriate amount of fixed assets / cash.
Finally, to the OP:
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All I used to hear was that actively managed funds would never beat an SP500 index fund like VFINX long term. People were flabbergasted by one fund that beat the SP500 year after year (7 years in a row I think it was).
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7 years is hardly long-term. It is expected that in the wide array of funds that someone whose fund should not be compared against the s&p500 will beat it. If on the other hand you look at the holdings of these so-called index killers, you'll see they are holding foreign funds, emerging markets, etc. The comparison is false, and the performance is all but guaranteed to not persist.
You could theoretically beat a well-diversified index portfolio (note that I didn't say the s&p500) by constantly switching from one hot fund to another over your 20-year period, but that would require you to be lucky dozens of times. Fat chance.