Mutual fund winners? Try 2 Out of 2,862 Funds

[Bob Of Burleson]

Who Routinely Trounces the Stock Market?

By JEFF SOMMER
The New York Times

When the stock market rose 30 percent in 2013, plenty of fund managers had a triumphant year.

Almost anyone can post good numbers in a bull market, though. It’s like sprinting downhill with the wind at your back: The chances are good that you’ll be pleased with your own performance.

Outperforming most other people consistently, year in and year out, is obviously a much more difficult feat, in any competition. But how rare is it, exactly, for stock market investing?

A new study by S.&P. Dow Jones Indices has some fresh and startling answers. The study, “Does Past Performance Matter? The Persistence Scorecard,” provides new arguments for investing in passively managed index funds — those that merely try to match market returns, not beat them.

Yet it won’t end the debate over active versus passive investing, because it also shows that a small number of active investors do manage to turn in remarkably good streaks for fairly long periods.

The study examined mutual fund performance in recent years. It found that very few funds have been consistently outstanding performers, and it corroborated the adage that past performance doesn’t guarantee future returns.

The S.&P. Dow Jones team looked at 2,862 mutual funds that had been operating for at least 12 months as of March 2010. Those funds were all broad, actively managed domestic stock funds. (The study excluded narrowly focused sector funds and leveraged funds that, essentially, used borrowed money to magnify their returns.)

The team selected the 25 percent of funds with the best performance over the 12 months through March 2010. Then the analysts asked how many of those funds — those in the top quarter for the original 12-month period — actually remained in the top quarter for the four succeeding 12-month periods through March 2014.

The answer was a vanishingly small number: Just 0.07 percent of the initial 2,862 funds managed to achieve top-quartile performance for those five successive years. If you do the math, that works out to just two funds. Put another way, 99.93 percent, or 2,860 of the 2,862 funds, failed the test.

. . .

A separate series of annual S.&P. Dow Jones studies has found that over extended periods, the average actively managed fund lags the average index fund. All of this may be enough to persuade you to abandon actively managed funds entirely.

But the story is more complex than that: The study also demonstrates that active managers can actually beat the market. Remember those two funds that did so consistently over the five years through March? The study didn’t identify them, but at my request Mr. Loggie did.

They were the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund, which were also the top two general domestic funds over the last five years through June, according to Morningstar performance rankings conducted recently for The New York Times.

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There is no news here.

It has been common knowledge since John Bogle wrote his first book.."Common Sense on Mutual funds" in the 1970s.
And I have been urging people here to read that book for years.