Here’s a good paper on the mutual fund industry from S&P. It shows more interesting evidence that the mutual fund world is, for the most part, a world of closet indexers charging excessive fees for something that they can’t deliver (via S&P):
– Very few funds can consistently stay at the top. Out of 703 funds that were in the top quartile as of
March 2011, only 4.69% managed to stay in the top quartile over three consecutive 12-month periods at
the end of March 2013. Further, 3.35% of the large-cap funds and 6.08% of the small-cap funds remain
in the top quartile. It is worth noting that no mid-cap funds managed to remain in the top quartile.
– For the three years ended March 2013, 16.57% of large-cap funds, 14.22% of mid-cap funds and
23.05% of small-cap funds maintained a top-half ranking over three consecutive 12-month periods.
Random expectations would suggest a rate of 25%.
– Looking at longer-term performance, only 2.41% of large-cap funds, 3.21% of mid-cap funds and 4.65%
of small-cap funds maintained a top-half performance over five consecutive 12-month periods. Random
expectations would suggest a repeat rate of 6.25%.
– While top-quartile and top-half repeat rates have been at or below the levels one expects based on
chance, there is consistency in the death rate of bottom-quartile funds. Across all market cap categories
and all periods studied, fourth-quartile funds had a much higher rate of being merged and liquidated.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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