Monday, April 6, 2015

Measure for Measure, Index Funds Rule

Measure for Measure, Index Funds Rule[1]

Once again, Jeff Sommer, author of the Strategies column in the business section of The New York Times has made an iron clad case for indexation.  Three weeks ago, I let his column substitute for my blog post in a piece called,  “How Many Mutual Funds Routinely Rout the Market? Zero.”  This morning I am letting his column “Measure for Measure, Index Funds Rule” substitute for my words.



Based on Standard and Poor’s semi-annual SPIVA contest which measures the performance of indexes versus active managers, over 75% of active managers failed to beat their benchmark over any meaningful time period.

Over the three years through December, the index beat 76.8 percent of the actively managed domestic stock funds. Over five years, it outdid 80.8 percent of them. Over 10 years, it beat 76.5 percent. Put simply, at least three-quarters of those actively managed mutual funds regularly failed to beat the broad market index over three, five and 10 years. This underperformance has persisted year after year.  (emphasis added)

Some analysts have suggested that active managers would do okay against the benchmark if their fees were reduced.  However, SPIVA data shows that even if you strip out expenses and fees, the vast majority of managers fail to beat their benchmark.  Only large cap managers eke out better returns, if they didn’t charges fees and expenses to their shareholders.

Mr. Sommer highlights two more disturbing points for those of you who employ active managers.  First, only 58% of the funds in existence ten years ago still exist.  In other words, 42% of the funds have been shut down or merged into other funds because they weren’t performing well.  Second, only 33.7% of the funds that survived over the past ten years adhered to their investment styles.  In other words, if you hired a large cap or growth mutual fund ten years ago there’s a very good chance that it morphed into something else.

The case for indexation is compelling.  Active mutual funds fail to perform, don’t survive, and lack consistency.






[1] http://www.nytimes.com/2015/04/05/your-money/measure-for-measure-index-funds-rule.html?ref=business&_r=0

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