The latest SPIVA Scorecard on the U.S. fund industry was released this week. Only 8% of large-cap, 5% of mid-cap, and 7% of small-cap fund managers beat their benchmarks over the past 15 years.
That’s pitiful. It shouldn’t be a surprise either.
Common sense says there are too many mutual funds to manage and not enough great money managers to go around. Just like anything else that requires skill, there’s a limited number of “best” people. The rest are average, mediocre, or worse.
Now add a high fee hurdle onto that par performance and things look worse (other hurdles also exist like size and job security).
It turns out, the only benefit of high fees is it pays for a marketing team and a sales force. Thanks to its marketing machine, the finance industry gets away with promoting average and mediocre as great.
They sell complexity. They sell uniqueness. They sell complicated. They sell dependency.
One of the best fund managers complained about this in 1990. Here’s Peter Lynch explaining why:
…they say the market is dominated by institutions and therefore we, the public, the individual investor, doesn’t have a chance. That really bothers me. I think the public has a better chance than they had 10 years ago, a better chance then they had 15 years ago.
Because the institutions are so bad.
You’ve had eight years of an up market and the public is out of it. They think of the so-called professionals, with all their computers and all their power, as having all the advantages. That is total crap. Obviously, if all you needed to make money in the stock market was a Cray computer, everybody would have a Cray computer and everbody with a Cray computer would be a billionaire. The S&P 500 for the five years through February is up 117.96%. The average mutual fund is up 81.4% for the last five years. People who own the funds think they have done well. They have made almost a double in five years. That is terrible. The market is up 115.96%. I can brag now: Magellan is up 154.4%. But look at 10 years, Magellan is up 971.4%; the S&P is up 343.8%. That is a four bagger. That is for 10 years. The general equity funds are up 283%. So it’s getting worse, the deterioration by professionals is getting worse. But the public thinks they are doing great because the average fund is up 283% in 10 years. They have made over four times on their money. But they’d be better off in an index fund. My only assumption is that the public is doing dreadful on their own. All I can think is that the public has managed to lose money in the last eight years.
This is why Lynch believed you could do it on your own and get better results. Index funds make it simpler for any investor to do just that.
The advantage of index funds is that you don’t have to find a great needle in a giant pile of crappy needles. You buy the index and you’re more than likely going to beat any manager you might have picked.
But following that route still requires effort, research, and discipline. Otherwise, you’re no better off.
Just make sure you pick a low-cost fund. That same marketing machine is also selling high-cost index funds.
SPIVA U.S. Year-End 2016 Scorecard
Is There Life After Babe Ruth? – Barron’s 4/2/1990
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- Amazon’s 2016 Letter to Shareholders (PDF) – J. Bezos
- How Thin is Your Ice? – S. Godin
- How Markets Overcame Past Geopolitical Crises – B. Carlson
- Just Keep Buying – Of Dollars and Data
- Short Investing Rules – M. Housel
- 20 Years In, Have TIPS Delivered? – Morningstar
- How Canada Completely Lost its Mind Over Real Estate – Maclean’s
- The Dark Secret at the Heart of AI – MIT Tech Review
- Automotive 2.0: The New Road Ahead to Autonomous Vehicles – ReadWrite