top of page

Inconvenient facts

Only 17.62% of active large-cap funds outperformed the S&P 500 over the five years ending June 30, 2017. Yes, you read that right. The rest failed. In other words, if you had invested with a professional money manager who dedicated their life’s work to allocating your hard-earned money, they would have lost 82.38% of the time against a robot that essentially works for free by tracking the S&P 500. And this is nothing new. Granted, it was over five years, and during a relatively bullish time for the markets, but the numbers don’t vary much when you account for bear markets, shorter time frames, or different kinds of investments, as we will soon find out.1

Mid-cap and small-cap funds lost 87% and 94%, respectively, over the same time period. Put bluntly, if you were a CFA paid to construct investment funds for a living, it would be somewhat of a miracle if you actually beat the benchmark index you were supposed to beat. If investment companies held their portfolio managers accountable for results, nearly all them would be looking for a new career.

Surely, though, these fund managers should be able to win with longer time frames, right? Wrong. It actually gets worse as the years go by. That’s why the career lifespan of a money manager doesn’t (and shouldn’t) really last that long. The smart ones make their big money and get out while they’re ahead. Just ask Peter Lynch, who returned on average 29% per year for his 13-year career as the brains behind Fidelity’s Magellan Fund. He grew the fund from $18 million in assets to $14 billion, and then he retired soon after. Lynch once said, “in this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” He wasn’t that far off with that statement. Although, we suspect if you’re actively trading against the benchmark indices, you’re probably only right two to three times out of ten, tops.

How bad does it get?

The longer the time horizon, the more difficult it becomes to beat the benchmarks. So, if you’re going to begin a relationship with a professional money manager, make sure it’s only for a short period of time. For example, over the 15-year period ending in June of 2017, 93% of large-cap fund managers lost to the S&P 500. It was about the same for both mid- and small-cap funds, at 94% underperforming when compared to their targets. It’s crazy to think that there’s still a market (and a thriving one at that) for something that doesn’t deliver what it’s supposed to 80 percent (or more) of the time.

What about fixed income?

Over the last year, yes, active fixed-income money managers outperformed in both government and corporate bonds, excluding intermediate-term government bonds. So, there is some value being created from portfolio managers, you just have to look really hard to find it. This doesn’t change the fact that your actively-managed fund, led by your superstar money man (or woman), is just as likely to go bust than it is stay in business over the long haul. Long term in this particular case is 15 years, and over that period ending June 30, 2017, 47% of all fixed income funds were merged or liquidated. Those are bad odds of survivorship. It gets worse with equities, too. 55% of all international equity funds have disappeared since 2002, and 58% of domestic equity funds that started back then no longer exist as of today.

It’s difficult to pick a winning fund over the long term. It’s more difficult to pick a fund manager, and harder yet to pick a financial advisor who knows of a winning fund manager or a winning fund that will stand the test of time. Simply put, the odds are against the long-term active investor. It’s kind of a shame too, because investing in active stocks, funds, ETFs, and the like is fun. The trouble is, investing is really not supposed to provide you with a sense of entertainment; it’s designed to make you money either through income streams, capital appreciation, or both.

Surely, actively-managed REITS can beat their benchmark index, right?

Kind of. But only over a one-year period. 57% beat their benchmark, but over 3-, 5-, 10-, and 15-year periods, they all lost, and not by inconsequential amounts. The losses ranged from 72% to 85%. Those aren’t small misses. This pales in comparison, however, to Emerging Market funds that have lost 95% of the time over the past 15 years. If you’re adamant about actively investing, over the past 10 years, you would have performed better had you gone with a large-cap value fund of some sort, as nearly 36% outperformed the S&P 500 Value index. There was still a 64% percent chance you were going to lose, however. Play the odds; allocate the majority of your portfolio to index funds, and actively invest the rest if you're seeking some excitement in an attempt to beat the market.

1. Note: All statistics taken from SPIVA at file:///C:/Users/caser/Downloads/spiva-us-mid-year-2017.pdf

bottom of page