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Wise advice by MJG in the recent post Will you revise your fund holdings going into 2013, regardless of "fiscal cliff", etc.? got me thinking...
He said, "The accumulated data finds that only a small percentage of wizards beat their proper benchmarks annually, and that percentage drops precipitously as the time horizon is expanded. Superior performance persistence is almost nonexistent."
So I dug into it a bit.
The table below summarizes how many funds have beaten the market since their inception (or since Jan 1962, as far back as my Steele Mutual Fund Expert database goes). I used only whole months in the calculations so that I could be consistent with two market benchmarks, the SP500 total return (since 1970, price only before) and the 30-day Treasury Bill.
Nearly 9000 mutual funds and ETFs were evaluated. I used load adjusted returns and only the oldest share class. I apologize to the bench mark police for using only SP500 and T-Bill. Nonetheless, I find the results interesting.
First, MJG is right. Less than half of all equity funds have beaten the SP500 over their life times; in fact, one in four have not even beaten the T-Bill, which means their Sharpe Ratios are less than zero!
Second, nearly all fixed income funds have beaten T-Bill performance, which is re-assuring, but fuels the perception that you can't lose money with bonds. The money market comparison is a bit skewed, because many of these funds are tax exempt. Still, expense ratios must be having their negative effect as only one in five such funds beat the T-Bill.
Digging a bit further, I looked at how the funds did by inception date. Here is a result I can't yet explain and would ask for the good help on MFO to better understand. It seems like the period from 1998 to 2002, which book-end the tech bubble, is a golden age, if you will, for funds, as more than 60% of the funds initiated during this period have beaten the SP500 over their life times. That's extraordinary, no? I thought maybe that it was because they were heavily international, small cap, or other, but I have not yet found the common thread for the superior performance.
On the other hand, the period from 1973 to 1982 was abysmal for funds, since only one in ten equity funds created during these years have beaten the SP500 over their life times. And it is not much better between 1983 and 1992.
I next broke-out this same performance by type: equity, asset allocation, fixed income, and money market:
Note that fixed income funds helped contribute to the "golden period" as more than a quarter of those incepted between 1998 and 2000 beat the SP500.
Some other interesting points:
Relatively few money market funds have been created since the cash bull run of the '80s.
But otherwise, fund creation is alive and well, with nearly 2000 funds established in the past three years, which accounts for one fifth of all funds in existence.
Fixed income fund performance has dropped a bit this year with 15 out of 100 losing money.
Here are links to remaining parts of this assessment: Part 2 (Equity), Part 3 (Asset Allocation), Part 4 (Fixed Income), and Part 5 (Money Market).