Winning Mutual Fund Analysis | white coat investor (2023)

Long-time (and hopefully short-term) readers know I'm a big fan ofIndex-Funds. I love the low costs, the broad diversification, the low turnover, the lack of managerial risk, and the loyalty to the investment strategy. The most important thing to me is that they generally outperform actively managed mutual funds in the long run. However, I never said that they will outperform ALL actively managed mutual funds in the future. There will always be at least a few winners. I had a readerpost a commentRecently this problem got me thinking again. The reader's conclusion from researching and publishing a group of actively managed mutual funds that outperformed the market was dead wrong due to some fundamental flaws, but it was fun to see who the winners were.

Using the Morningstar data, the reader essentially went back to the year he graduated from high school in 1982 and looked at all the top-performing stock funds. The best thing from 1982 to 2020 was the Fidelity Select Health Care Fund. Your conclusion? That you should invest in health stocks from now on. The flaws in it were immediately obvious to anyone who spent much time on it.a book by Jack Bogle.

1. Only one health fund outperformed the market. The second best healthcare fund during the period underperformed the S&P 500 Index.
2. The list contained only the winners. There were only 129 funds on the list. The data is heavily affected by survival bias. Outperforming mutual funds generally do not close. How many mutual funds were there in 1982? Jack BoglesCommon sense when investingit says there were 331. In 1991, 1 of 6 was missing. After 38 years, 3 of 5 are gone. We only looked at the top 39% of funds that existed in 1982.
3. There is no guarantee that past performance will continue. In fact, the data shows that it is quite unlikely.
4. Performance data like this is heavily influenced by returns at the end of the reporting period.

Nonetheless, I found this reader's research very interesting. I found it interesting for a completely different reason! His 1982 list of 129 survivors showed that only 26 of them outperformed the Vanguard 500 Index Fund (launched in 1976). For example, of the 331 funds that existed in 1982, only 26, or just 8%, outperformed the market. What money was that? We'll see. This shows how much an investment of $10,000 on July 1, 1982 would have grown by the end of April 2020.

There are a few things worth mentioning on this list.

Remember this was a list of 129 funds. I only show the first 27. So the 500 Index Fund is not at the bottom of the list, it's at the top of the list.

1. Of the 26 funds that outperformed the 500 Index Fund during that 38-year period, only 8 outperformed the index by more than 1% per year. 8 out of 331 is only 2.4%. Too much risk management, not enough maximum return.
2. Most of these funds have a much higher trading volume and therefore less tax efficiency than an index fund. Therefore, the after-tax return on those funds is even worse in a taxable account. For comparison, let's take a look at the Columbia Acorn Fund. Morningstar reports a recent churn rate of 101%. Thus, on average, all shares in the fund are bought and sold each year. The 500 Index Fund has a 4% turnover, which means shares are sold every 25 years on average. You can imagine the comparable tax efficiency and consequent tax burden on Acorn fund returns.
3. Many of these funds charge a fee. This fee is not reflected in these statements. It is true that even an 8% exposure is not very high on average over 38 years, but it is not zero.
4. I mentioned earlier that performance data of this type is heavily influenced by returns at the end of the reporting period. Growth stocks and large stocks have outperformed the broader market for the past 5-10 years, although value stocks and small stocks have outperformed the market over the long term. So it should come as no surprise that the majority of these 26 winners were high-growth stocks. Keep in mind that most healthcare and technology stocks are also large- and mid-cap growth stocks. Of the 26 winners, 15 were large-cap growth or mid-cap growth equity funds. Of the large mixed funds (best compared to the 500 Index Fund), only 5 outperformed the index, none by more than 1% per year. If anything has to impress you, it's the only great value fund on the list (Dodge & Cox), the only small blended fund on the list (Royco Pennsylvania), the only retirement fund on the list (PGIM Jennison), and the two global funds list funds (American Funds New Perspective and Invesco Oppenheimer Global).

I think it's pretty clear that even though there are 26 winners here, the correct decision a priori in 1982 would have been to simply invest in an index fund, but draw your own conclusions from this data.

Fund data to 10 years with Fidelity and Vanguard

As I reflected on the past data, I thought it would be fun to look at some mutual fund analysts to see what could be gleaned from the most recent data. Both Fidelity and Vanguard have mutual fund trackers on their websites, so on May 2, 2020 I went ahead and checked out the list of large blended funds. Now, the performance data on both sides goes back just 10 years. But I've ranked each fund by performance over that 10-year period.

loyalty

Fidelity's website has raised a combined 526 large funds that have been around for the last 10 years. (Remember that these data have a survivorship bias as all funds that have failed in the last ten years are not included in the data.) I have arranged them from top to bottom. There were 27 background pages on the list. The first 500 index fund is at the bottom of the first page. Most of the second page consisted of index funds.

Which funds outperformed the 500 Index Fund? Well, there were 19 of them. 19 of 526. Only 3.6%. After just 10 years, the market has outperformed more than 96% of active managers, before taxes and excluding survivorship bias. So what were the means? Well, to make matters worse, many of them were simply different classes of shares in the same fund. Actually, there were only 11 best. Here they are (list of best performing stock classes):

Yes, the Fidelity 500 fund outperformed the Vanguard fund by 0.02% over the period. So I ended the list there. Vanguard's roster should be pretty similar.

Vanguard

Vanguard found 364 funds, but only let me see 250 of them, so I only had to look for funds with positive returns in the last 10 years (apparently there were 114 large blended funds that had no positive returns in the last 10 years). Vanguard is apparently skipping some funds, as is Fidelity. The Vanguard listing did not have Fidelity funds, just as the Fidelity listing omitted many of the Vanguard index funds. Competitive business, that Anyway, here's the list of winners over the last 10 years at Vanguard.

The lists differ slightly, presumably due to different methods, such as B. Using different stock classes, including all loads and exact days. As well as some bias in the exclusion of funds from its main competitors! But the point is that the lists are very much in agreement with each other. There are eight winners appearing on both lists.

But you know what is really interesting? None of these 8 funds appeared in my reader's search. None of the Big 5 mixed funds that have beaten an index fund over a 38-year period have done so in the last 10 years. Although I include growth stock funds in the analysis, few of the winners have made it to my readers' 38-year list and my 10-year list. Here you are:

Of the 15 growth stock funds on my reader's initial 38-year list, only 7 have beaten the 500 index fund in the last 10 years, and only 3 of those have beaten a growth stock index fund. , 1 by more than 1% per year .year. This fund was a technology fund and had underperformed its index peer, the iShares US Technology ETF, by more than 1% over the past 10 years. And remember that the 38 year period INCLUDES the 10 year period and actually weighs heavily on it. If I'm looking at two completely different time periods, there may not be an overlap.

Repeat after me:

• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.
• Past performance is not an indication of future results.

Repeat until you believe. Because it's true. And that's before correction for survival bias. And before the tax correction. And before the cost of the payout is determined, an adviser selects some successful mutual funds.

Dave Ramsey likes to say that it's easy to find "good growth stock funds that are outperforming the S&P 500" and "getting a 12% return." And that he can easily get help with this by hiring one of them.authorized sellers of mutual funds. This statement does not support the data. He readily admits that he is not a stock market expert and has entered the real estate finance space. But that's no excuse to ignore data like this. And all the long-term data looks like this.

The stock (or fund) picker's dilemma

Well, dear reader, if your stock portfolio doesn't consist entirely of cheap index funds, you're in for a dilemma.

and useactively managed mutual fundsWhy do you think you will be able to pick a winner let alone a winner across all asset classes in your portfolio? Why would you bet on bets with such low odds?

if you trychoose actions yourselfSo why do you think you'll be able to outperform the market when essentially none of these people have been able to do so in a meaningful way over the long term? If you can really pick stocks well enough to beat the market at cost, why only manage your own money? Not only are you leaving billions on the table, you're also hurting your fellow investors.

If you honestly monitor your returns, especially after taxes, after expenses, and after time, you will soon become a safe index fund investor. There is no other reasonable approach. The data is impressive. If you want to invest money in a way where your efforts and expertise have a chance to add value to the equation, look for an asset class other than publicly traded stock markets to do so. Maybe small businesses, websites, or real estate.

What do you think? Does it surprise you that the list of winners is so short and so unlikely to be repeated? If you use actively managed mutual funds or pick your own stocks, why persist in the face of such data? How is this a good use of your time? Comment below!