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News Flash: Closet Index Funds Underperform

Goldman Sachs passed on a stunning figure this morning on the performance of many mutual funds year to date (via BI):

“Calendar year 2014 is now 1/3 behind us and for many equity portfolio managers the calendar is turning into an annus horribilis to use the phrase immortalized by Queen Elizabeth II,” wrote Goldman Sachs’ David Kostin in a new note to clients. “Nearly 90% of large-cap growth mutual funds, 90% of value funds, and 2/3 of core funds are trailing their style return benchmarks YTD (1%, 4%, and 2%, respectively).” (emphasis added)

That’s pretty amazing, but it also shouldn’t surprise us at all.  Now, these returns aren’t risk adjusted, but that generally doesn’t matter for most mutual funds because the cookie cutter mutual fund style boxes tend to be just that – cookie cutter strategies.  So, a “large cap growth” fund will generally take a chunk of the large cap growth universe and try to outperform the entire index.  The problem is, when you “pick” 200 stocks out of, let’s say, a 500 stock index, then you’re basically already mirroring the index to a large degree.  And that’s what the vast majority of mutual funds look like when you benchmark them properly.  So this shouldn’t surprise us.  What should surprise us is how these funds still have any assets under management when their strategies are basically just an expensive version of an index….

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