It is very difficult to beat the stock or bond markets with any regularity.
Every year, some investors succeed, of course, but can they do it consistently? A new study of actively managed mutual funds from S&P Dow Jones Indices asked this question and came up with a surprising result.
She revealed that not a single mutual fund — not a single one — has managed to beat its benchmark in the US stock or bond markets consistently and convincingly over the past five years. These results are even worse than 2014 and 2015, the last time I looked at this topic closely.
“If you want to be adventurous and choose stocks or actively managed funds, go for it, of course,” said Tim Edwards, global head of index investing strategy at S&P Dow Jones Indices, in an interview. But understand the risks you are taking. »
These results support practical advice that has been the subject of consensus for decades. Forget trying to beat the odds and outsmart everyone else. Instead, use low-cost stock and bond index funds that reflect the overall market, and hold onto them for decades. Don’t worry about fads or fancy market forecasts.
While it is possible to beat index funds, it is not easy to do in the long term, and as Paul Samuelson, the first American to receive the Nobel Prize in economics in the 1970s, said, this not worth trying for most of us.
Yet, especially in a year like this – where the stock and bond markets have suffered horrendous losses – it is tempting to look for a better solution. Why stick with index funds, which simply follow the market, and ensure you get results that any sane person would consider terrible?
Choosing stocks and bonds yourself – or hiring a professional to do so – may seem like a better solution. But before you go down that road, review the latest data available. They show that as bad as index funds have been, actively managed funds have generally been worse.
Scorecards
For 20 years, S&P Dow Jones Indices has provided “scorecards” that compare the performance of active mutual fund managers with a series of benchmarks, or indices, that represent the broader stock and bond markets, or parts of these.
Many mutual funds and exchange-traded funds mirror these indexes, and a fundamental question arises for any investment strategy: does it beat the index? S&P Dow Jones Indices also tracks the number of funds that consistently beat the indices, year after year.
In short, these newsletters have never been particularly good for actively managed funds. Studies have shown that most actively managed mutual funds underperform their benchmark, both over the long term and in the vast majority of calendar years, in the United States and elsewhere in the world.
For example, the last time the average active US equity fund beat the S&P 500 stock index for a full calendar year was in 2009. And over a full 20-year period ending last December, less than 10% of active US equity funds managed to beat their benchmark.
You may think it’s easier to beat the market when the value of stocks and bonds goes down. It turns out that’s not the case.
Lack of regularity
Over the past five years, not a single mutual fund has consistently beaten the market, as defined by S&P Dow Jones Indices for two decades.
The S&P Dow Jones team reviewed all 2,132 actively managed broad-spectrum domestic equity mutual funds that had been in operation for at least 12 months as of June 2018. (The study excluded funds narrowly focused sectors and leveraged funds which essentially used borrowed money to amplify their returns.)
The team selected the top 25% performing funds over the 12 months to June 2018. Then, analysts asked how many of those funds remained in the top quarter for the next four 12-month periods, up to in June 2022.
The answer: none.
Not a single one of the 2,132 initial funds has managed to achieve a top quartile performance in these five successive years. This hasn’t happened for equity funds since 2011. This time, S&P Dow Jones Indices performed the same measurements for fixed income funds and came up with the same result: zero. Not a single bond fund remained in the top quarter for each 12-month period.
While being in the top 25% year after year is a pretty lofty goal, it seems reasonable to me. But S&P Dow Jones Indices also used a simpler test. How many funds ended up in the top 50% year after year over five years? For these 2,132 equity funds, the response was only 1%. It is still a dismal result.
The implications
Why did all actively managed funds perform so poorly in the S&P Dow Jones tests? In an interview, Mr Edwards said two things were going on.
First, it is always difficult to beat the market consistently. We have two decades that show it. Very few people can do it in the best times.
Tim Edwards, Global Head of Index Investing Strategy at S&P Dow Jones Indices
“What’s more subtle is the fact that no one has been able to do that lately,” he continued. And what that shows is that what worked well for investors from 2017 to 2021, for example, just didn’t work in 2022 when the markets turned around. In other words, markets are efficient enough that it’s hard to be better than average for long, and when trends change drastically like they did this year, almost everyone is caught off guard. -foot.
This is a classic reason for relying primarily on index funds – essentially, accepting overall market returns, no better no worse. Note that for the 20 years to June, the S&P 500 had an average annual return of over 9%, which means your investment has doubled in value every eight years. That’s pretty much what an index fund would have done for you – and it’s better than the vast majority of actively managed funds have been able to do.
That’s why index funds are basic long-term investments, even in a year like this when markets are down.
This article was originally published in the New York Times.