Research Confirms Actively Managed Funds Struggle to Outperform

High costs and portfolio turnover remain key drags on performance over time.

Key Takeaways

  • Most actively managed funds do not outperform their benchmarks over time.
  • These mediocre results are heavily influenced by high costs and high turnover.
  • A strong track record one year has little bearing on whether good results persist into the future.
  • When selecting a fund, don’t just look at past results. Consider the manager’s philosophy, the portfolio’s design, and the fund’s cost structure.

In a recent blog post, I compared the likelihood of seeing a Wolpertinger, the mythical Bavarian woodland creature, to predicting which active manager will reliably outperform their benchmark. Suffice it to say, there is a very low probability of either outcome occurring.

Here I will summarize the results of a recent study that evaluated U.S. equity and fixed income mutual funds. The results are as follows:

Key findings:

  1. Most of the mutual funds studied underperformed their benchmarks over multiple time frames.
  2. These results are most likely due to the high costs and high turnover associated with active management.
  3. A strong track record one year has little bearing on whether the good performance will persist into the future.

Lessons:

  1. Markets efficiently and quickly aggregate investor knowledge into stock and bond prices.
  2. Managers who attempt to outguess market prices (by picking stocks and/or by timing markets) often incur high costs that make it even harder to outperform their benchmarks.
  3. Investing successfully in mutual funds requires more than picking a top performing fund from the past.
  4. When selecting a fund, it’s critical to consider the manager’s market philosophy, the robustness of the portfolios design, and the fund’s cost structure among other factors.

Here’s the reality: This study offers no new information. Countless studies have come to the same conclusion in the aggregate– investors should concentrate only on what they can control.

A successful investor’s To-Do list:

  1. Let the markets work for you.
  2. Consider fund expenses and turnover before you invest.
  3. Diversify.
  4. Stay disciplined

You can download the results of the study here. If you have any questions or comments, I encourage you to contact me anytime.

 

 

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About Chas Boinske

Charles P. Boinske, CFA, is a 30 year investment management veteran overseeing the strategic direction and portfolio management process for Independence Advisors, LLC. Have a question for Charles? CLICK HERE TO ASK CHARLES

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