Your Money
How Many Mutual
Funds Routinely Rout the Market? Zero
MARCH
14, 2015
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Minh Uong/The New York Times
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The bull market in stocks turned six last Monday, and despite some
rocky stretches — like last week, when the market fell — it has
generally been a very pleasant time for money managers, who have often
posted good numbers.
Look
more closely at those gaudy returns, however, and you may see
something startling. The truth is that very few professional investors
have actually managed to outperform the rising market consistently
over those years.
In
fact, based on the updated findings and definitions of a particular
study, it appears that no
mutual fund managers have.
I
wrote about the initial findings of that study
last summer. It is called “Does
Past Performance Matter? The Persistence Scorecard,” and it is
conducted by S.&P. Dow Jones Indices twice a year. The edition of the
study that I focused on began in March 2009, the start of the bull
market.
It
included 2,862 broad, actively managed domestic stock mutual funds
that were in operation for the 12 months through 2010. The S.&P. Dow
Jones team winnowed the funds based on performance. It selected the 25
percent of funds with the best returns over those 12 months — and then
asked how many of those funds actually remained in the top quarter in
each of the four succeeding 12-month periods through March 2014.
The
answer was remarkably low: two.
Just
two funds — the Hodges Small Cap fund and the AMG SouthernSun Small
Cap fund — managed to hold on to their berths in the top quarter every
year for five years running. And for the 2,862 funds as a whole, that
record is even a little worse than you would have expected from random
chance alone.
In
other words, if all of the managers of the 2,862 funds hadn’t bothered
to try to pick stocks at all — if they had merely flipped coins — they
would, as a group, probably have produced better numbers. Instead of
two funds at the end of five years, basic probability theory tells us
there should have been three. (If you’re curious, I explained how the
math works in a
subsequent column, “Heads or
Tails? Either Way, You Might Beat a Stock Picker.”)
The study seemed to support the considerable body of evidence
suggesting that most people shouldn’t even try to beat the market:
Just pick low-cost index funds, assemble a balanced and appropriate
portfolio for your specific needs, and give up on active fund
management.
The
data in the study didn’t prove that the mutual fund managers lacked
talent or that you couldn’t beat the market. But, as Keith Loggie, the
senior director of global research and design at S.&P. Dow Jones
Indices, said in an interview last week, the evidence certainly didn’t
bolster the case for investing with active fund managers.
“Looking at the numbers, you can’t tell whether there is skill
involved in what they do or whether their performance is just a matter
of luck,” Mr. Loggie said. “I believe that many of them do have skill.
But even if they do have it, based on how they’ve done in the past you
really can’t predict how they will perform in the future.”
Still,
those two funds did manage to perform splendidly in that study. Their
stubborn persistence at the top of the heap over that five-year period
suggested that there was some hope for active fund managers. If they
could do it, after all, others could, too.
But
we’re now about two weeks away from the completion of another 12
months since the end of that study, and it’s been a mediocre stretch,
at best, for those two mutual funds. When the month is over, to borrow
from Agatha Christie, it looks as though we’ll be saying: And then
there were none.
Here
are the dismal statistics: The SouthernSun Small Cap fund has actually
lost money for investors over the 12 months through Thursday. It was
down 3.2 percent, according to Morningstar, and for the nine months
through December, it was in the bottom quartile of funds in the S.&P.
Dow Jones study. The Hodges Small Cap fund has done better, gaining
almost 6 percent through Thursday. S.&.P. Dow Jones Indices says that
put it in the third quartile — or second-to-worst one — through
December. While it’s mathematically possible, it is highly unlikely
that either will climb to the top quartile in the next few weeks, Mr.
Loggie said.
Michael W. Cook, the lead manager of the
SouthernSun Small Cap fund and
the founder of the firm that runs it, was traveling last week and was
unavailable to comment for this column. Craig Hodges, manager of the
family-run
Hodges Small Cap fund in Dallas,
spoke to me on the telephone and told me that he wasn’t surprised that
his fund had stumbled. “We’re not that good,” he said. “It was going
to happen sooner or later. We’ve never expected to outperform all of
the time.” And despite disappointing recent returns, both funds are
still beating the market handily over the last five years.
Late
last year, Mr. Hodges said, his fund was hurt by falling energy
prices, which pulled down the returns of several of its holdings.
“That kind of thing will happen,” he said. “You can expect that.” Last
summer, he told me that over the long run — which he said is probably
50 years or more — he expects that his fund will do better than
average. And he reiterated that view last week. “We’ll come out all
right in the end,” he said. “I think if you pick a good manager,
someone you believe in and you think you can trust, you’ve got to
stick with him for a long time, and if he’s good, he’ll perform for
you.”
Mr.
Loggie and his crew are continuing their regular monitoring of mutual
fund performance. Right on schedule, they did another winnowing of
mutual funds through the five years that ended in September — and they
will do another one for the five years ending this month.
The
September performance derby produced more funds that ended up
consistently in the top quartile — nine of them, Mr. Loggie said.
“That’s not surprising,” he said. “Some periods you have more funds,
some periods you have less.”
But
what you never have, he said, is any indication that past performance
predicts future returns. “It’s possible that any one of these funds
will beat the market over the long term,” he said. “Some of them will
do that. But the problem is that we don’t know which of them will do
that in advance.” And that, in a nutshell, is the kernel of the
argument for buying index funds.
A version of this article appears in print on March 15, 2015, on page
BU4 of the New York edition with the headline: How Many Mutual Funds
Routinely Rout the Market? Zero.
© 2015 The
New York Times Company