The Performance of Actively Managed Mutual Funds

Even if you have not been good this year, fret not, you still have something under the tree from me. Every six months, the S&P Indices publishes a review of mutual fund performance specifically tracking the performance by the hot hand of prior years. They examine the persistence top half and top quartile (for Auburn folks the latter translates to top 25 percent) funds exhibit.

For actively managed mutual funds, the results are the proverbial lump of coal. Of the funds in the top half in September 2005, only 4.16 percent of large-company funds and 4.55 percent of small company funds maintained a top-half ranking over five consecutive years. Statistically, random outcomes suggest a 6.25 percent rate.

With other time frames, the results are overwhelming (or underwhelming if it’s your money). In September of 2008, data shows 595 U.S. equity stock funds in the top quartile. One year later, 21.51 percent of the funds remained while two years later only 5.21 percent could stay in the top quartile for consecutive years.

The longer you look at the numbers, the worse the results are. In September of 2006, there were 542 U.S. equity stock funds in the top quartile. A year later, less than 13 percent were still standing. Of that amount, only 1.85 percent could remain in the top 25 in consecutive years. By 2010, not a single solitary fund in the Class of 2006 Top 25 could stay for five consecutive years. A Georgia Bulldog fan can relate.

The mainstream investment community must perpetuate the myth of performance or else the industry’s substantial investment fees could not be justified. In an in-house study, Morningstar found their own vaunted stars were less of a predictor than the annual fees charged. Jack Bogle, founder of Vanguard Group, eloquently pointed out, “In the investment fund business, you get what you don’t pay for.”

On Nov. 18, The Wall Street Journal published an excerpt from the latest edition of Burton Malkiel’s “A Random Walk down Wall Street” where he recommends using index funds as the core (at the very least) of your investment strategy. His logic is simple: Low-cost index funds outperform the majority of actively managed mutual funds. Very few professionals can consistently “beat the market” over the years. For some odd reason, Internet bulletin boards seem to house a high proportion of these shrewd investors.

I own and endorse “A Random Walk down Wall Street.” Laney and Jenny keep a copy on the shelf at Sundog Books and the gift-wrapping comes free.

About the author

Buz Livingston, CFP®

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