Why Consistent Fund Performance Is Overrated

Observant1

"It’s a mistake to seek funds that will consistently outperform.
While long winning streaks are associated with outperformance,
it’s rare for funds to repeatedly top their indexes, making them hard to identify upfront."

"Moreover, long-term winners often take a circuitous route to outperformance,
perhaps topping their indexes over a span of a year or two, then lagging, only to resume their winning ways."

https://www.morningstar.com/funds/why-consistent-fund-performance-is-overrated

equalizer

“Instead, investors would be better served focusing on the attributes that our research has found are more closely associated with long-term success—the prudence of a fund’s strategy; the depth, breadth, and continuity of its investment team; the investor-centricity of the sponsoring fund company; and, above all, fees.”

And here is a link to subscribe to our research…

Not bad, just a little pricey.

bee

Thanks @Observant1,

Reminds me of funds I am still patient with:
VHCOX
VWIAX
PRWCX
PRHSX
FSMEX
VHT (VGHCX)

Reminds me of funds I lost my patients with:
PRNHX
FAIRX
FMIJX

jptak

equalizer said:

“Instead, investors would be better served focusing on the attributes that our research has found are more closely associated with long-term success—the prudence of a fund’s strategy; the depth, breadth, and continuity of its investment team; the investor-centricity of the sponsoring fund company; and, above all, fees.”

And here is a link to subscribe to our research…

Not bad, just a little pricey.

Appreciate the comment. But you did omit the article's last sentence which read "For those not inclined to devote the time and energy attempting to uncover strategies that fit this description, indexing beckons."

fwiw.

Thanks again for considering the article.

Regards,

Jeff Ptak
Morningstar Research Services

Observant1

It's not uncommon for funds to lag category peers from time to time.
Generally speaking, I get concerned if a fund materially underperforms its category
for three consecutive years. Performance is analyzed on a case-by-case basis.
Some funds frequently produce very "lumpy" returns (e.g., OAKIX).

equalizer

jptak said:

Appreciate the comment. But you did omit the article's last sentence which read "For those not inclined to devote the time and energy attempting to uncover strategies that fit this description, indexing beckons."

fwiw.

Thanks again for considering the article.

Regards,

Jeff Ptak
Morningstar Research Services

Cut out indexing since most here are already familiar with indexing.

Morningstar research is actually solid 9/10, didn’t give proper respect with my pithy comment above. Newsletter pricing at $150 each is a little pricey.

Enjoying the heat wave in Chicago today?

WABAC

For the IRA I do like to be in funds that consistently do better than peers on the draw-down side. For that I don't care quite so much about the upside. But I'm a few short years away from distributions and not trying to make up for lost ground.

I quit M* and signed up for MFO Premium after M* gutted what they had been offering to regular subscribers.

If they didn't have the legacy portfolios I would have no reason to look at their website ever again.

DrVenture

In my experience, the funds that have the best long term results are the most volatile. So, consistency is not something that I require in my high performers. Maybe for a retirement portfolio, I may prefer it. Something for me to consider.

Sven

It is hard to swallow high ER’s when active managed funds fail to outpace their benchmark more than 50% of the time period. So why not indexing, especially large cap funds? Consistency is not easily to quantified. I use MFO Premium to look at the maximin % drawdown and duration of recovery versus their indexes over one or more market cycle.

Bonds are different stories as there are many flavors of the same bond from the same firm. Indexing all these flavors is not feasible. Few bond managers such as Pimco’s Bill Gross and Dan Ivascyn managed tend to do well against their benchmark for extended period.

msf

Investors often have an understandable but ultimately irrational fascination with "better" vs. "worse" as a binary value. If they lose money on an investment, they will often wait to break even (not be worse off) before selling a clunker. Whether an investment beats its benchmark by 1% in half the years and underperforms by a few basis points in the other half (a superb overall achievement) or the reverse doesn't matter by this metric.

Jeff provides better insight when comparing long term performance with volatility of excess performance. Volatility is not a binary value.

It's not surprising that funds with the best (and worst) long term performances have the highest volatility. Index huggers with their low excess return volatility would be expected to fall within the middle quartiles of performance. OTOH, even funds that are in the top decile year after year won't beat their bogies by a similar amount each year. They'll likely be more volatile. And the worst performers are their mirror images.

But is volatility vis a vis benchmark performance even what investors care about? When @DrVenture writes of possibly wanting lower volatility in retirement portfolios, is the good doctor thinking of excess volatility vs. a volatile market or absolute volatility? I suspect the latter.

If the whole market is down 40% when retirement money is needed, is one really going to be happy that one's investment is down "only" 30%, even though that's a 10% outperformance?

Finally, I agree with @Observant1 (lumpy fund performance) and Jeff's conclusion that:
"long-term winners often take a circuitous route to outperformance, perhaps topping their indexes over a span of a year or two, then lagging, only to resume their winning ways."

Look at VPMAX. Out of the ten calendar year M* reports (including 2026) it outperformed the index in five and underperformed in five. And three consecutive years of abysmal performance (2019-2021).

As of the end of 2024 it had a ten year performance that was half a percent (annualized) below its benchmark (per prospectus). As of Jan 12, its ten year performance is nearly a percent above its benchmark (per M*). Showing that snapshots in time of "lumpy" funds may be meaningless. Even long term snapshots.

equalizer

Msf,

Joel and Theo have been managing VPMCX for 37-40 years with 13.7% return, about 2% over index. For a $75B fund that’s acceptable.

VGHCX has returned 15% since 1984, but that was mostly due to Ed Owen’s performance that was 16.4% vs 10.7% for SP500 from 1984 to 2012, when he retired.

msf

"When it comes to picking funds, it might mean a strategy that consistently edges past its benchmark index."

The selection of a benchmark makes a difference. From the quote above, it looks like Jeff may have used whatever benchmark the fund specified. At least I hope so. For the past several years, VGHCX's stated benchmark has been MSCI ACWI Health Care Index. (VPMAX specified the S&P 500 over the period I wrote about.)

For the period ending Dec 2024, VGHCX bested its index 7.26% to 7.01% for the index. (Prospectus). Taking the 10 year span from 12/31/2012 to 12/31/2022, it bested its benchmark 13.58% to 12.03%. For the preceding decade (2003-2012), it beat the MSCI ACWI Health Care Index 7.54% to 7.06%. It did even better against the S&P Health Care Index, that returned just 6.13%. Curiously, its benchmark, splicing the two indexes, returned only 6.01%.

Going further back by decades (now with the S&P Health Care Index as benchmark), for the decade 1993-2002, VGHCX beat its benchmark 18.67% to 13.85%. That prospectus also shows the S&P 500 average return as 11.26%. Which suggests that the 16.4% vs. 10.7% return you mention may have been due in part to comparing to a mismatched index (US equity market rather than health care). Still admiral performance, but perhaps not quite the 6% gap shown.

For the first decade of this fund (May 23, 1984 through Jan 31, 1994), the prospectus provides returns but does not offer a benchmark with which to compare. Rather, it offers a variety of different benchmarks: "Each of the investment company members of the Vanguard Group, including Vanguard Specialized Portfolios, Inc., may, from time to time, use one or more of the following unmanaged indices for comparative performance purposes." Nothing especially related to health care, I'm afraid.

jptak

msf said:

"When it comes to picking funds, it might mean a strategy that consistently edges past its benchmark index."

The selection of a benchmark makes a difference. From the quote above, it looks like Jeff may have used whatever benchmark the fund specified.

Hi there. I used the benchmark that corresponds to each fund's Morningstar Category classification, not what the fund chose (which can be unreliable). So for instance Large Growth vs Russell 1000 Growth Index, Small Value vs. Russell 2000 Value Index, Int Core bond vs. the Agg, and so forth. In this way, the analysis controls for style based on holdings-based style-analysis that we conduct.

I hope this clarifies it.

Regards,

Jeff Ptak
Morningstar Research Services

equalizer

Msf,

All good points. Only healthcare fund that seems to have done better is a global fund -
Janus Henderson Global Life Sciences Fund. JNGLX