Wednesday, April 19, 2017

Massacre of the Stock Pickers

Investors who use index funds to invest in the stock market usually do better than stock pickers. That's become conventional wisdom.
According to new 15-year data in SPIVA's 2016 scorecard of stock fund performance, "usually" should be changed to "almost always."

Fewer than one large-cap stock fund in ten matched or beat its benchmark over the last fifteen years. More than 92% underperformed. 

Some say indexing itself has dulled the price moves of large caps, making stock pickers' job harder. Perhaps the pickers did better with mid caps? No, they did worse. A whopping 95% of mid-cap funds underperformed. So did 93% of small-cap funds.

Note that some mid-cap and small-cap funds may have beaten the S&P 500 even though they fell short of their more challenging benchmarks.

If actively managed mutual funds can't  beat the market, can highly-compensated hedge fund managers do better? That's the theory Warren Buffett put to his now famous test.  He bet that, over ten years, Vanguard's low-expense S&P-500 index fund would outperform a portfolio of five funds of funds, invested in more than 100 hedge funds. After nine years the results are clear: Another massacre of the active investors.

Buffett observes that the defeat was virtually pre-ordained. Some 60% of the funds-of-funds' gains were paid to the hedge fund managers and fund-of-fund packagers.
As long as "nobody wants to be average," active stock picking will live on. Hope springs eternal, as The Wall Street Journal($) reports: Active Managers Stage a Comeback.

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