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How to Beat the Stock Market Without Even Lying

MarkMark
in Fund Discussions
WSJ article by Jason Zweig.

"You know all that stuff you’ve been hearing for so long about how fund managers can’t beat the market?

It isn’t true. Fund managers can easily beat the market. All they have to do is change which market they’re trying to beat.

Hundreds of them have been doing just that for years. Such maneuvers are perfectly legal—and investors need to fend for themselves, because regulators have so far been paying little attention.

A new study by finance professors Kevin Mullally of the University of Central Florida and Andrea Rossi of the University of Arizona finds that between 2006 and 2018, 37% of all U.S. stock mutual funds pulled this kind of switcheroo."

ARTICLE

Comments

  • WABACWABAC
    The article is behind a paywall. So I can't read their argument. But hey, which market?

    Most funds I have ever looked at compare themselves to some sort of bench-mark index--even if one of their own creation. I don't remember any of the funds I have invested in bouncing from bench mark to bench mark.
  • CrashCrash
    But the point is taken. And it doesn't surprise me. The "Average Joe" ---- meaning financially ignorant Joe---- would not even understand what Zweig's explanation MEANS, sad to say.
  • MarkMark
    Here is a PDF of the study Zweig referenced in his article.
  • CrashCrash
    thanks.
  • WABACWABAC
    op cit
    Notably, we find that 1,050 out of 2,870 funds made a change to their prospectus benchmarks
    at least once over a 13-year period. Because we collect data on funds’ benchmarks beginning
    in 2005, the first year in which we can detect changes is 2006. The average fund in our sample
    reports 1.44 benchmarks per year and makes 0.84 benchmark changes during our sample
    period.

    I'm glad they did the research. But there are a lot of other red flags out there like cost, load, turnover, manager investment, whether the company is publicly owned, etc.
    Funds that make at least one benchmark
    change make an average of 2.27 changes during this period, suggesting that there is a serial
    component to this behavior. Funds making at least one benchmark change also report
    significantly more benchmarks each year (1.74) than the group of funds that never makes a
    benchmark change (1.23).
    Not surprising. I had some choices like that in some retirement plans my employers got us into.
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