“Past performance doesn’t guarantee future results.” If you’ve ever watched any commercial for a company that provides a professional service – whether it be a lawyer, accountant or other business – you’ve likely heard this phrase uttered. It’s a simple stipulation of advertising. But when it comes to fund management, the adage is essentially fact.
In a rather illuminating new study, S&P Dow Jones Indices looked at mutual fund performances over the last five years, including more than 2,800 broad domestic stock funds that have been operating since March 2010. The study was rather simple: take the top 25 percentile in terms of performance in 2010 and see how the funds did through the years.
Exactly 99.93% failed to book a top quartile performance for five straight years. Or in simpler terms, two of the 2,862 funds significantly outperformed the competition each year over the duration of the study. Two.
Looking past the raw data, the narrative is even bleaker for those claiming to be the best of the best, year in and year out. In fact, annual performances seemed, for lack of a better term, somewhat random. Funds that stayed afloat throughout the duration of the study often found themselves looking up at the competition one year, and down the next.
“The data shows a likelihood for the best-performing funds to become the worst-performing funds and vice versa,” according to the report, first covered by the New York Times.
While it’s admittedly difficult to provide industry-leading returns each year, the study sullies the image of the great American stock picker a bit. It also gives investors reason to not jump to a new fund if theirs had a bad year. Or it says: dump all your money in an index and forget these guys.
For what it’s worth, the two funds that remained in the top quartile all five years were the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund, according to the Times. Those funds have truly earned the right to call themselves “industry-leading.” At least for now.
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