FUNDamentally Poor
Performance
by
MF DowMan
One of the easiest and by far the most popular investing strategies out there is to buy mutual funds. There are thousands of 'em clamoring for your savings like crowds of kids for candy. And each one has an army of professional managers and researchers ferreting out the best opportunities for you. Only the best opportunities. Right? Only the best for you. Right? Looking out for your best interests every step of the way, right? Right?!?
Well. . . maybe not.
In my early work on Beating the Dow and high-yield stock strategies, I often wondered how mutual funds stacked up against our beloved Fool approaches. So I decided, once I'd freed up some time, to do my own survey, sorting almost 6,000 mutual funds by 3-year, 5-year and 10-year returns. Then I compared them to the benchmark that mutual fund managers try to beat every year---the S&P 500 Index.
Ready for a shock? Of the 5,845 mutual funds, fewer than half have been in business long enough to even have 3-year performance records. So half the field's dismissed from my survey at the outset. Of the remaining 2,615 funds, a paltry 510 managed to perform better than the S&P 500 over the past three years. In other words, over 80% of the funds in the database have lost money to the overall market's performance since 1992. Ouch.
Well, I thought, maybe three years isn't indicative of an overall trend. I mean, these are PAID professionals. So what about the five-year record? The number of funds with 5-year records dropped to 1,936, but the percentage that lost to the market didn't change much: 79% of those funds fell short of the S&P 500, which averaged 10.8% for five years.
The 10-year survey was even more telling. Out of 780 funds with 10-year records, only 99 were able to beat the S&P 500 average return of 13.8%. A miserable 87% of the funds in the game for ten years *lost* to the market.
On a roll now, I put the group through a final test, wondering how many funds managed to beat the S&P 500 for ALL THREE periods. The grand total? Only 43 of the 780 funds with 10-year records beat the market in all three time-horizons. Less than 6%.
How does this compare with Beating the Dow? Using the 5-stock BTD approach from 1985-1994, here's how the simple high-yield strategy stacks up:
* Over the last three years (1993-1995), the S&P 500 returned an average of 7.9% while BTD returned 21.3%.
* Over the last five years (1991-1995), the S&P averaged 10.8%, while BTD averaged 19.7%.
* Over the last ten years (1986-1995), the S&P average was 13.8%. Beating the Dow's average return for the decade was 20.5%.
Anyone still feel they're getting their money's worth paying those mutual fund fees? If your fund is doing better than the BTD returns, congratulations! Hang on to it. If it's not, and it probably isn't, perhaps it's time to consider becoming your own portfolio gooroo, and paying *yourself* for a change rather than the variety of people involved in selling you an investment vehicle that traditionally underperforms the average.
When they tell me that Fooldom is now populated by a number of big-name fund managers and well-known institutional stars. . . I'm glad I've trained myself to look past them to the world of the private investor. In my mind, next time a financier tells you, honorable Fool, that you're nothing more than an amateur investor. . . thank him!