Actively managed mutual funds fail to beat markets, study finds | Jobs Vox

The answer was nothing.

For those five consecutive years, not one of the top 2,132 funds achieved a top-quarter performance. That hasn’t been the case for stock funds since 2011. This time, the S&P Dow Jones Indices did the same measurements for fixed income funds and came up with the same result: zero. Not a single bond fund remained in the top quarter every 12 months.

While scoring in the top 25 percent year after year is a very high hurdle, it seems reasonable to me. But the S&P Dow Jones Indices also used a simple test. How many funds have completed more than 50 percent year-over-year over five years? For those 2,132 stock funds, the response was just 1 percent. That’s still an unfortunate result.

Consider a very large public school with over 2,100 students per classroom. Not all high performers always score in the top 25 percent of their class, but I expect at least some of them to do so every five years. If no one can do this, I wonder why. If only 1 percent — 21 out of 2,100 — perform better than average every year over five years, I think there’s something wrong with the school or the grades.

The implications

Why did all actively managed funds perform so poorly in the S&P Dow Jones tests? In the interview, Mr. Edwards said two things are happening.

“First of all, it’s always difficult to consistently beat the market,” he said. “We’ve got two decades to show that. Very few people can do this in a very good time.

“What’s even more subtle is that no one has been able to do it recently,” he continued. “And this shows that whatever worked well for investors from 2017 to 2021 will not work in 2022 when the markets change.” In other words, the markets are efficient enough that it’s hard to be better than average for long, and when trends fluctuate as dramatically as they have this year, almost everyone is on the wrong foot.

This is the main reason for relying primarily on index funds – essentially accepting the returns of the overall market, no better and no worse. For 20 years from June to June, the S&P 500 has returned an average of more than 9 percent annually — meaning your investment will double every eight years. That’s what an index fund does for you — and it’s better than most actively managed funds can do.