Charts of the day, mutual-fund outperformance edition

September 11, 2012
Dan McCrum has found an interesting nugget in the data of my corporate cousins at Lipper:

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The FT’s Dan McCrum has found an interesting nugget in the data of my corporate cousins at Lipper:

Mutual funds are not performing as badly as last year, when just 27 per cent offered better returns than the benchmark they choose to track, according to research group Lipper. But, again, the majority still trail in 2012.

This was crying out for a chart, so here you go, with many thanks to Matt Lemieux:


This is a bit noisy, however, and most people (I hope) hold their mutual funds for periods of a bit longer than a year. So here’s the chart looking at what percentage of active mutual funds beat their benchmarks over three years:


And if you’re the kind of sensible person who holds their mutual funds for five years, at that point things start becoming more predictable, and we can start overlaying lines:


This is pretty much in line with the latest Spiva analysis, as of year-end 2011, which shows just 16% of equity funds outperforming the S&P Composite 1500 over 1 year to end-2011, 43% outperforming over three years, and 38% outperforming over five years. For bond funds, the Spiva numbers are much worse: if you look at page 18 of the PDF, you’ll see that over five years it’s pretty much unheard-of for bond funds to beat their benchmark, especially those funds investing in long-dated bonds.

If we go back even further, the numbers, as you might at this point expect, just become worse. Over 10 years, the proportion of active mutual funds outperforming their benchmark never goes above 35%, and between 1981 and 1991, it was just 27%. Over 30 years, just 31.5% of active mutual funds outperformed their benchmark. And that’s before adjusting for survivorship bias, or the fact that investors tend to be late to the party, investing in high-performing mutual funds after they’ve had their period of outperformance, and just before they mean-revert.

All of which is to say that picking an outperforming mutual fund is at least as hard as picking stocks. And while there are some famously successful stock-pickers out there, I’ve never heard of a very successful mutual-fund picker. So, don’t bother. Throw all your money in a Vanguard target-date fund, and forget about it. It’s much easier, and you’ll end up with more money when you finally need it.

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