Stocks have been going up and upfor six years now, but manyordinary investorsaren’t reaping the full benefits of those gains.
If they aren’tbuying and selling their stocks at the wrong time, many people are staying put — in costly mutual funds that aren’t doingany better than the stock market overall. In fact, research shows that the number of active mutual funds outperforming the market on a consistent basis isn’t just low, it’s zero.
A study by S&P Dow Jones Indices looked at 2,862 actively managed, domestic stock mutual funds and pulled out the ones that were top performers in the 12 months starting March 2009, when the market bottomed out and the bull market began.
It then looked at which of those funds stayed in the top 25 percent for four years, through March 2014. Jeff Sommer explained the resultsin the New York Times this weekend:
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.
By the end of this month, which would markanother year since the study was last updated, the list of persistently top performers is expected toshrink from two to zero, Sommer wrote.
But the takeaway from the research is not so much about these two funds as it is about active management in general. The day of the rock-star fund manager appears to belong gone. Yes, some fund managersmay execute a strategy that trounces the broader market one year, propelling them to the top of the class. But they are also just as likely to sink to the bottom the following year.
Indeed, the research from S&PDow Jones Indices found that many managers did just that, with the move from top to bottom being much more common than the other direction. About 27 percent of the funds that started in the top quartile during the five years between 2004 and 2009slidto the bottom during the followingfive years. And about14 percent of those that started in the bottom quartile moved to the top quartileover the same time period.
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To be sure, that doesn’t necessarily mean that these funds lost money during that period. Some may still have performed well over the long term, and investors who stayed put, instead of buying and selling shares frequently, may have given those managers a chance to bounce back.
But the research is a reminder that you can’t predict returns and that many investors may be better off in low-cost index funds. Investors who chased goodperformance and who were willing to pay higher fees because of the higher returns ofthe moment, would have beendisappointed in subsequent years when performance lulled.
In some cases, the payoff isn’t seen until the long run.Craig Hodges, manager of the Hodges Small Cap fund, told the New York Times that he thought his fund will do better than average over the long-term, which could be 50 years or more.
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Washington Post contributor Chris Mayer explained the benefits of long-term investing in a story about a“coffee-can” portfolio,where investors put money into a diversified mix of stocks and leave itthere for at least 10 years. The benefits are that trading costs stay low; so dothe taxes. Plus investors would remove the risk of buying high and selling low.
Some people may be catching on the idea of very, very long-term investing. Investors have been pouring millions of dollars into a fund that boughtstocks in major U.S. companies in 1935 — and hasn’t made a new bet in 80 years.
TheVoya Corporate Leaders Trust Fund is outperforming in the long-run, beating theStandard & Poor’s 500-stock index by one percentage point on average a year over the past 10 years and the past five years. However, it has lagged the index over the last year, gaining about 6 percent, compared to a 13.5 percent gainsfor the S&P 500.
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