Actively managed funds underperform the market, year after year. Ariadne Wealth Management’s recent study of Fidelity’s 136 large cap mutual funds shows that NONE of Fidelity’s large cap mutual funds beat the S&P 500. Not a single one!
This study proves that the actively managed mutual fund model doesn’t work. You may find the odd, superb fund manager (like Peter Lynch) who delivers outperformance but they are very rare. If you want consistent outperformance, they’re nearly impossible to find.
Standard & Poor’s determined that 88% of actively managed mutual funds fail to beat their benchmarks. There are several reasons why actively managed funds underperform:
1. Funds have higher expenses: On average, a mutual fund has about 0.6% higher cost. So, you’re already starting out at a 0.6% disadvantage in the average fund. Just to keep up with the market, the fund needs to beat it by a considerable margin.
2. Funds aren’t flexible and can’t diversify: A mutual fund has to stick to its mandate. If it’s a large cap fund, it can’t invest in small cap stocks, and a value fund won’t buy a momentum stock, growth stock, etc. As an individual investor, you are more flexible and you can diversify your portfolio and include a variety of market caps, sectors and strategies.
3. A fund can’t buy small winners: The biggest advantage an individual investor has over a mutual fund is the ability to choose some small stocks that can become big winners. Big mutual funds can’t invest in a small stock without strongly moving shares higher. That would impact their returns, so they mostly ignore small companies. As an individual investor, your purchase of even a few thousand shares won’t move the market.
4. Size: In order to accumulate a meaningful position in a stock, it can take days or weeks to buy enough stock and not move the market. An individual investor can accomplish this with one click.
If you don’t want to pick your own stocks, then invest in an index fund. It will it be cheaper and statistics show, you’ll make more money.
Sven Franssen