45 Sec. read
“Fund investors are confident that they can consistently select superior fund managers. They are wrong.” (preface)
Jack Meyer (considered one of the best endowment managers and tripled Harvard’s endowment fund) said this, “The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong.” (p.7)
David Swenson (who has one of the best records for Yale’s endowment fund) said this, “The 96 percent of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealth-destroying margin of 4.8 percent per annum.” (p.36)
Examples:
1, In the last 15 years, 90% of actively managed mutual funds failed to beat their benchmark index. The S and P 500 beat 97% of actively managed large cap core funds!
In 1970 there was 355 mutual funds. From 1970-2016, only 10 out of these 355 mutual funds beat the S and P 500. The top 2 Mutual funds beat the S and P 500 by only 2 percent. How would you know which 2 funds would have beaten the S and P 500? Don’t look for the needle, buy the haystack!
In the last 25 years, the S and P 500 index was averaging 9.1 percent a year, while the average fund investor was only earning 6.3 percent a year.
2. Usually the lower the fund’s expense, the better the fund performs. The S and P 500 index fund has the lowest expense ratio of 0.04%. “Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.” (p. 60)
3. Should you pick a 5 star fund? Picking a 5 star fund is bad since it will most likely due bad due to Regression to the Mean. Funds can get lucky, but when their luck runs out, they do much worse. In 2004, there was a study for 5 star funds. 10 years later only 14% of 5 star funds kept a 5 star rating. 36% of these funds dropped to a 1 star fund, and the rest of the funds have dropped to 3 stars or lower.
“Yes, there are rare cases where skill seems to be involved, but it would require decades to determine how much of a fund’s success can be attributed to luck, and how much attributed to skill.” (p. 133)