How many mutual funds beat the S&P 500 on a percentage basis after operational fees?
This is a great question because essentially what you are asking is “how many managers have enough skill to beat the market after all fees and expenses?” Before we give you an answer it is essential that we are comparing apples to apples. So if we are asking how many managers outperform the S&P 500, which is a US large cap index, then we need to look at the performance of active managers who are trying to pick the winners in the US large cap asset class. We don’t want to look at small cap managers or foreign stock managers or bond managers because we would then be comparing apples to oranges.
All right, enough with the fruit. Based on the Standard & Poor’s Index Versus Active (SPIVA) scorecard as of June 30, 2015, 65.34% of large cap managers underperformed the S&P 500 for the 1-year period. Over the last 5-year period, 80.8% underperformed the S&P 500. Over the last 10-year period, 79.59% of active managers underperformed. These types of figures are very similar in other asset classes like small cap stocks and foreign stocks.
Rest assured, it is very, very difficult to do over long time horizons, which is why we tell our investors to buy and hold a globally diversified portfolio of index funds versus trying to pick the next best winner.
A company called SPIVA releases their findings on this very topic every few months or so. Their study measures the % of mutual funds that are outperformed by their relative benchmark. For the S&P 500 you would be looking at US large cap funds. Through mid-year 2015 about 65% underperformed over a 1 and 5 year period, and about 80% underperformed over the 10 year period.
The difficulties in attempting to beat the market are well chronicled. Finding the next great fund manager before they fall into the small percentage of winners has proven just as difficult. Over short periods of time it’s almost impossible to determine if any outperformance was due to luck or skill.
Investors are too focused on returns these days and do not pay attention to risk metrics. After all, the VIX is at all time low.
The large-cap space is really hard to beat in the short run. Most stocks have a wide coverage by research analyst and media and there is not a lot of room for price discovery. Even the mutual funds that beat the index, do it by few a small margin.
That being said, there are other benefits you can look for in an active manager - risk-adjusted returns, drawdowns, risk management, manager's terms and experience. When things turn ugly like they did in 2008, an active manager with a small portfolio with high quality could do much better than the index.
Depending on your time frame and year, it could be as few as 3%-5% or in some years as many as 30% or more. Historically, high fees were a tremendous burden to mutual funds. As fees have dropped the gap has narrowed. Bear in mind not all mutual funds track the S&P 500, thereby making some comparison more like apples to oranges.
The other responders have helpfully pointed out that well under 50% of active mutual funds outperform their benchmarks. That actually UNDERSTATES the problem with identifying superior money management. Not only is it difficult to beat the market, those few that do demonstrate no ability to outperform outside the initially observed measuring period. For example, identifying a top quartile manager over some trailing time frame offers NO insight into future performance.
Out of 568 domestic equity funds that were in the top quartile as of March 2015, only 1.94% managed to stay in the top quartile at the end of March 2017. Furthermore, 0.92% of the large-cap funds, 2.38% of the mid-cap funds, and 2.26% of the small-cap funds remained in the top quartile. That's WORSE than random chance would suggest. If someone makes an NBA all star team in 2016, we can reasonalby infer that they will have a fine NBA season in 2017. Not so with "all star" fund managers.
S&P publishes a detailed scorecard on the ability of fund managers in many different asset classes to sustain superior performance. The data is rather sobering. Here is a link to their page with recent peristance scorecards.