High costs and portfolio turnover remain key drags on performance over time.
- 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:
- Most of the mutual funds studied underperformed their benchmarks over multiple time frames.
- These results are most likely due to the high costs and high turnover associated with active management.
- A strong track record one year has little bearing on whether the good performance will persist into the future.
- Markets efficiently and quickly aggregate investor knowledge into stock and bond prices.
- 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.
- Investing successfully in mutual funds requires more than picking a top performing fund from the past.
- 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:
- Let the markets work for you.
- Consider fund expenses and turnover before you invest.
- Stay disciplined