“No large-cap, mid-cap, or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period.”
This is one of the findings from S&P / Dow Jones related to “the ability of top-performing funds to maintain their status” and persist as top-performing funds.
Until founding Fiduciary Wealth Partners in 2012, I spent my career managing and advising portfolios of actively managed funds. I believed in them. I was quite good at it. I received an award one year being the top advisor of actively equity strategies for the large Wall Street firm I worked for at the time.
Now, however I often find myself quoting from the movie Field of Dreams.
Say It Ain’t So
Like the little boy, who reportedly after hearing of his idol’s involvement in throwing the 1919 World Series, begged Shoeless Joe Jackson’s to “Say It Ain’t So,” negative news about something we have believed in for many years is hard to take.
In the past, active management was the only game on Wall Street, and managers with hot hands were put on pedestals. Many of us grew up in an investment world that was dominated by reports of star active portfolio managers such as Warren Buffett and Peter Lynch.
Like most anyone, I believe that people who work harder should have an advantage. As with many things, however, it is not all about working harder. You need to work smarter, not let emotion get the better of you, and stay focused on the evidence about what works consistently over multiple long-term periods.
What does the evidence now consistently show?
“The best way to own common stocks is through index funds.”
– Warren Buffett, Berkshire Hathaway 1996 Shareholder Letter
“All the time and effort people devote to picking the right fund, the hot hand, the great manager, have, in most cases, led to no advantage.”
– Peter Lynch, Beat the Street, 1993
I have written a lot about this in the past, so I’ll keep this short this time and just finish with a quote from a well-respected active manager data analysis firm, Morningstar.
“In most cases, the odds of picking a future long-term winner from the best performing quintile in each category aren’t materially different than selecting from the bottom quintile.”
Yes, it’s hard for many alpha-oriented investment personalities such as me to swallow, but the evidence in favor of index funds is real and consistent.
Stay it ain’t so, Joe. Say it ain’t so.
Are Selectors Good at Selecting? – Elisabetta Basilico, Phd, CFA
S&P Dow Jones – Does Past Performance Matter? – The Persistence Scorecard
Morningstar – Performance Persistence Among Mutual Funds