Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Support MFO
Donate through PayPal
How Unloved Is Active Management? Even Outperformance Is Being Snubbed
IMHO this is good news, since it means we can expect less bloat, less of a headache for managers having to deal with hot money, and more good funds reopening.
The object is to do well over time, not each and every year. In this article, they looked at how many funds outperformed (defined as being in the top 25%) annually over the past year, and a year ago, and two years ago, etc. Surprise, surprise, no funds outperform every year. From this they concluded that that funds don't outperform for more than three years or so. Wrong.
I ran a similar screen - except instead of using years ending Jan 31, I used years ending Dec. 31. Similar (and useless) results. After 2 years (2016 and 2015) I found 1026 share classes (vs. the 1098 that the article reported using Jan 31 ending dates). After three years I came up with 455 share classes, that amounted to about 183 different funds.
After six years of this (2016-2011), I got 41 share classes amounting to a tad over a dozen funds. Over eight calendar years (as opposed to years ending Jan 31), I found 18 share classes (9 funds). That's nine more funds than the article reported for years ending Jan 31. FWIW: UTAHX, RSGYX, GMCDX, LLDYX, NCSPX, PFORX, PISIX, PIFZX, and VMPYX.
But it's an absurd exercise. Backing up to five years (since there's data on five year performance), there are only 72 share classes that outperformed each of the past five calendar years (34 funds). Yet obviously 1/4 of the funds that have existed for five years have outperformed their peers (defined at being in the top 25%). Over 1700 funds.
Even if we add in the requirements that the funds must also have performed in the top 25% over the past three and one years, we still get around 600 funds. Roughly 20 times the number of funds that this article suggests.
This is why one should be skeptical of anyone saying that a fund consistently outperforms. Just as one should be skeptical of articles using consistency (over relatively small periods like a year at a time) as a metric for long term performance.
How many index funds outperformed 75% of their peers year in, year out, for five, six, seven years? Hint: The only index fund that managed this feat for even five years is VSCSX.
Comments
The object is to do well over time, not each and every year. In this article, they looked at how many funds outperformed (defined as being in the top 25%) annually over the past year, and a year ago, and two years ago, etc. Surprise, surprise, no funds outperform every year. From this they concluded that that funds don't outperform for more than three years or so. Wrong.
I ran a similar screen - except instead of using years ending Jan 31, I used years ending Dec. 31. Similar (and useless) results. After 2 years (2016 and 2015) I found 1026 share classes (vs. the 1098 that the article reported using Jan 31 ending dates). After three years I came up with 455 share classes, that amounted to about 183 different funds.
After six years of this (2016-2011), I got 41 share classes amounting to a tad over a dozen funds. Over eight calendar years (as opposed to years ending Jan 31), I found 18 share classes (9 funds). That's nine more funds than the article reported for years ending Jan 31. FWIW: UTAHX, RSGYX, GMCDX, LLDYX, NCSPX, PFORX, PISIX, PIFZX, and VMPYX.
But it's an absurd exercise. Backing up to five years (since there's data on five year performance), there are only 72 share classes that outperformed each of the past five calendar years (34 funds). Yet obviously 1/4 of the funds that have existed for five years have outperformed their peers (defined at being in the top 25%). Over 1700 funds.
Even if we add in the requirements that the funds must also have performed in the top 25% over the past three and one years, we still get around 600 funds. Roughly 20 times the number of funds that this article suggests.
This is why one should be skeptical of anyone saying that a fund consistently outperforms. Just as one should be skeptical of articles using consistency (over relatively small periods like a year at a time) as a metric for long term performance.
How many index funds outperformed 75% of their peers year in, year out, for five, six, seven years? Hint: The only index fund that managed this feat for even five years is VSCSX.