87% of all funds return less than S&P??????

Discussion in 'Trading' started by kapama, Sep 30, 2007.

  1. kapama


    I read this article in WSJ sometime ago and since I trust their information, I am schocked.

    How can this be true? Are all these people unaware of the S&P index fund or any other index funds for that matter?

    Forget the return, investors to these funds, why are they paying all those expense ratios and front load charges and back end charges? Just to receive returns less than S&P??? I can understand some funds returning less than the index but 87% of all funds???

    C'ommmon what am I missing here?
  2. Most people outside of the industry have no idea what an index fund is. Unfortunately, even the ones who do know are locked into company 401k plans that have specific mutual fund choices to pick from (no index funds).

    It's all a big scam by the Wall St. titans to keep milking free money from the American sheeple.

  4. There are many good articles or papers that talk about the challenges of active vs. passive investing but it should be noted that not all funds are attempting to beat the S&P, many are targeting specific sector exposure, others are going for growth or value or capital gains vs. dividend income, lower drawdown, volatility, etc, etc. Those usually get grouped into that 75-80% of funds don't beat the S&P figure that everyone throws around.

    Having said that, I don't think you are missing much. Its fairly common knowledge with most investors these days that passive strategies and benchmarking do outpeform many managers.........hence the explosion of money into etf's and the vanguards of this world.

    Money flows, where money grows, as they say. :)

  5. The answer is quite simple. Most people are stupid.
  6. Hi, kapama

    > 87% of all funds return less than S&P??????

    I read something similar more than 10 years ago.

    Maybe we do not have to pay any penny to professional active managers. But when the market is plunging, they can outperform the index due to their cash positions.
  7. Since more and more money is going into "managed" products, the underperformance will continue because people want somebody else to make the buy/sell decisions.
  8. gbos


    It’s normal. For example a significant contribution to the index return can come from a small number of stocks. If a large number of funds don’t have them in their portfolio they will underperform. Put in the equation the expenses etc… To illustrate the point I did a (not so realistic) quick monte carlo experiment with 100 funds each investing in 20 of 100 available uncorrelated stocks. With 2% commissions-expenses more than 60% of the funds underperformed the balanced 100 stocks index.

    ' Dimensioning
    Dim i As Integer
    Dim j As Integer
    Dim k As Integer
    Dim a(1 To 100,1 To 100) As Double ' the allocation table of 100 funds in 100 stocks
    Dim s(1 To 100) As Double ' random stock prices
    Dim iportf As Double ' index portfolio value
    Dim fportf As Double ' fund portfolio value
    Dim nportf As Double ' nbr of funds that are bellow index portfolio value
    Dim averagen As Double ' average nbr of funds that are bellow index portfolio value after 1000 sims
    Dim coms As Double ' commisions 
    ' Functions
    ' random numbers following gauss distribution               *
    Function gaussMT() As Double
    Dim fac As Double, r As Double, v1 As Double, v2 As Double
        v1 = 2 * Rnd() - 1
        v2 = 2 * Rnd() - 1
        r = v1 ^ 2 + v2 ^ 2
        If (r >= 1) Then GoTo g_10
        fac = Sqr(-2 * Log(r) / r)
        gaussMT = v2 * fac
    End Function
    ' next closing price given
    Function F_NextPrice(byval Prev As Double, byval mean As Double, byval vol As Double, byval tm As Double) As Double
        F_NextPrice = Prev * Exp((mean - vol ^ 2 / 2) * tm + vol * gaussMT() * Sqr(tm))
    End Function
    ' populate the allocation matrix
    For i = 1 To 100
    	For j = 1 To 20
    		k = Int(100*Rnd())+1
    		a(i,k) = a(i,k) + 5
    	Next j	
    Next i
    ' print percentage of allocations that are bellow a ballanced index portfolio (use 10000 simulations)
    coms = 2
    For k = 1 To 10000
    	' genarate 100 uncorrelated stock prices for the 100 stocks
    	For i = 1 To 100
    		s(i) = F_NextPrice(1, 0.04, 0.3, 1)	
    	Next i
    	iportf = 0
    	For i = 1 To 100
    		iportf = iportf + s(i)	
    	Next i
    	'Print "index: ";iportf
    	nportf = 0
    	For i = 1 To 100
    		fportf = 0
    		For j = 1 To 100
    			fportf = fportf + a(i,j) * s (j)
    		Next j
    		'Print "fund ";i; ": ";fportf
    		If fportf < iportf + coms Then nportf = nportf + 1
    	Next i
    	'Print "nbr of funds below index: ";nportf
    	averagen = averagen + nportf
    Next k
    averagen = averagen/10000
    Print "average nbr of funds below index: ";averagen
  9. From what I know most mutual funds do not benchmark against the SP500. Why would a corporate bond fund, japan small cap equity or alternative energy fund be compared to the SP500?
  10. From :

    Mutual Fund Performance:
    An Empirical Decomposition into
    Stock-Picking Talent, Style,
    Transactions Costs, and Expenses



    F. Do Funds that Trade More Frequently Generate Better Performance?

    A concept that is central to the idea of actively managed funds outperforming
    index funds is that higher levels of trading activity are associated
    with better stock-picking abilities. Do higher levels of mutual fund trading
    result in higher levels of performance? Our next tests address this issue by
    examining the performance of high- versus low-turnover funds. If more frequent
    trading is associated with managers having better stock-picking talents,
    then we should observe a corresponding increase in performance, at least before trading costs and expenses are factored in. If, instead, managers
    trade more frequently in an attempt to convince investors that they can
    successfully pick stocks, we should see no increase in performance before
    costs and expenses. In this case, we should actually see lower performance,
    after costs and expenses are deducted, for frequent traders. Carhart ~1997!
    finds evidence that supports this view, although his data set does not allow
    an examination of performance at the stock holdings level.
    We proceed as follows. At the end of each year, beginning on December 31,
    1975, and ending December 31, 1993, we rank all mutual funds ~with at
    least a one-year history! on their turnover level of the prior year ~the “ranking
    year”!. Fractile portfolios are formed based on this ranking, and TNAaverage
    fund returns and characteristics are computed over the following
    year ~the “test year”!. In computing the test year average returns or performance
    measures, we first compute TNA-average measures for each quarter
    of the test year, across all funds that existed during that quarter ~whether or
    not they survived past the end of the quarter! to minimize survival bias.
    Then, these quarterly TNA-weighted buy-and-hold returns are compounded
    into a quarterly rebalanced test-year return.

    #10     Oct 1, 2007