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?
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.
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.
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.
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.
Itâs normal. For example a significant contribution to the index return can come from a small number of stocks. If a large number of funds donât 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. Code: ' Dimensioning Randomize 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 g_10: 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 Sleep
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?
From : Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses THE JOURNAL OF FINANCE ⢠VOL. LV, NO. 4 ⢠AUGUST 2000 RUSS WERMERS* 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 âranking yearâ!. Fractile portfolios are formed based on this ranking, and TNAaverage fund returns and characteristics are computed over the following year ~the âtest yearâ!. 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. http://www.rhsmith.umd.edu/faculty/rwermers/mutuals.pdf