Fama's efficient market hypothesis and mutual funds

msf

Fama has honed his EMH so much over the decades that I'm not sure how much value there is in reading his early writings. Nevertheless, I was looking at Random Walks in Stock Market Prices, a brief (6 page), nonacademic paper from 1965.

I was struck by his statement he "reported the results of a study which suggest that if the initial loading charges of mutual funds are ignored, on average the funds do about as well as a randomly selected portfolio." Emphasis added. That performance would seem to include the effect of recurring expenses (management fees, trading costs, administrative expenses, etc.). So, if (all else being equal) one selected a portfolio of below average cost funds, it seems one would likely beat the market.

Seems strange, since this would contradict EMH (and provide a simple strategy for selecting mutual funds).

msf

Fama's study was reported in his paper The Behavior of Stock-Market Prices. Unfortunately, an obvious flaw in the study was his disregarding survivorship bias, which would tend to overstate the fund industry's returns.

Still interesting for the table (Table 18) of stock funds that survived from 1950 to 1960 - see how many you recognize.

bee

Hi msf,

Jeff Gundlach address efficient portfolio construction with this chart in which compares the typical 60/40 conservative portfolio to a multi-asset strategy. The devil is in the details.

Here's his slide...part of a link that Catch22 provided:

http://www.businessinsider.com/heres-why-jeff-gundlachs-multi-asset-growth-fund-is-outperforming-the-markets-2011-10#-3