NEW YORK, United States (AP):
If you think you can beat the market, you're probably wrong. And if you think your fund manager can, you are likely wrong again.
Roughly two thirds of professionally managed large-cap equity mutual funds are outperformed by the Standard & Poor's 500 stock index after expenses.
The one third that beat the market in any particular year are just as likely to underperform the market in the next year, according to a study by Burton G. Malkiel, Chemical Bank Chairman's Professor of Economics at Princeton University and author of the book A Random Walk Down Wall Street.
For those still bent on finding funds that beat the indexes, Credit Suisse did a 2003 scouting report with a list of 31 funds whose 10-year returns, from 1992 to 2002, beat the indexes.
It also examined what made the Standard & Poor's 500 as strong as it is.
The strength of the S&P 500 may lie in its simplicity, and its low turnover, according to the report.
The committee that picks the S&P 500 looks for stocks with sufficient liquidity and four quarters of positive net income on an operating basis. It looks for the leading companies in U.S. industries. It adds stocks to sectors that are underweighted to better approximate the large-cap market and it drops stocks that would be dropped if the index were created today.
Index funds that track the S&P 500 tend to have very low costs.
Funds that beat the S&P 500 had a few things in common, Credit Suisse found. Their portfolio turnover averaged 30 per cent, much lower than the industry
average of nearly 110 per cent.
buy undervalued stocks
The funds shared a "value" - investing style, in which the fund managers buy undervalued stocks. The funds had a high concentration of assets, with an average of 37 per cent of assets in their top-10 holdings. The final characteristic was that most were based outside New York or Boston. Instead, they were based in Chicago, Salt Lake City, Memphis, Omaha and Baltimore.
The Associated Press reevaluated the funds to see if they're still beating the index. Of 31 funds in the Credit Suisse report, 19 beat the S&P 500 for the past five years. Nine under-performed and three can't be tracked.
Looking at the funds that continued to outperform the S&P 500, 10 were closed to new investors, or, in the case of Wasatch Core Growth, to all investors, according to Morningstar Inc.
Those funds are Fidelity New Millennium, Janus Small-Cap Value Institutional, Longleaf Partners, Sequoia, Fidelity Low-Priced Stock, Dodge & Cox Stock, T Rowe Price Mid-Cap Growth, Longleaf Partners Small Cap and T Rowe Price Small-Cap Value.
Of the remaining, Morningstar, has caveats on a few. At Excelsior Value & Restructuring, "Lingering regulatory concerns undermine this mutual fund's otherwise strong case."
Morningstar also points to "outstanding regulatory issues" at Heartland Value. Morningstar calls Federated Kaufmann K a fund with "flaws." Of Gabelli Value A, Morningstar sniffs, "Who needs a media, telecom, and industrials fund? Practically no one."
The remaining funds both outperformed the S&P 500 and had solid write-ups from Morningstar: Wasatch Core Growth, Clipper, Vanguard Primecap, American Funds Growth Fund of America and Ariel.
Finding a fund that beats the indexes consistently really is like finding a needle in a haystack.
Which brings us back to Malkiel who writes that the typical equity fund underperforms the index fund by more than two per cent. He blames actively-managed funds' "considerably higher" management fees and higher portfolio turnover.
His advice isn't to chase down the rare fund that beats the market.
"The best stock market investment strategy is to invest in low-cost, low turnover, broad-based index funds."
Finding a fund that beats
the indexes
consistently
really is like finding a needle in a haystack.
