L'AGEFI: Friday, November 4th 2011
Very few products outperform their reference indices. Even over several years.
About 5,000 companies - about 7- 10% of the total number of listed companies worldwide - represent 95% of market capitalisation. And these are essentially the basis for about 225,000 long-only funds currently available on the markets. A ratio of 1 to 45.
Whether these are shares-only funds (almost half), or those invested only in bonds (just over 20%), the same security (and similar combinations of securities) are to be found thousands of times, with each fund manager proclaiming that theirs is a unique, quality approach. It is hard for both investors and advisors to work out where they are in this jungle. The first selection criterion is performance. Yet before even comparing funds between themselves, it is interesting to compare several basic indicators. At this time just a third of funds can show a 3-year performance superior to MSCI World. And just 17% are capable of outperforming the S&P 500. Of the almost 24,000 funds invested in the USA, less than 40% have a 3-year performance superior to the S&P 500, while of the 16,000 funds invested in the UK, barely over a third outperform the FTSE 100.
In theory the active management of a fund is the way to outperform the base index. Which is an attractive idea for investors. Why be satisfied with an index fund when you can achieve the performance of the index without the expenses and commissions? However, it appears to be difficult if not impossible to show that "active funds" regularly outperform their index. And it is even more difficult to identify which fund will outperform it in a given year. The phenomenon is not new. A survey by Vanguard has shown that in the period 1997- 2007, most active funds of US shares under-performed the indices they were trying to beat. According to the survey, 84% of large-blend funds underperformed them and 68% of small and medium cap value funds did not do better. The situation gets worse among bonds funds, with 95% of actively managed ones underperforming their indices over the 10 years surveyed.
Amongst those who do get good results in a given year, it is hard to identify which are the real experts and which are just lucky. Another survey, carried out by Barclays Global Investors, showed that the chances that a manager would repeatedly beat his indices were low. In the period 1993-2007, only 41.7% of managers who outperformed the S&P 500 during one year, succeeded in repeating the achievement the following year. Over 3 years, the ratio fell to 9.7%. The results were similar for small and medium cap funds and emerging markets funds. All this says that investors must be particularly careful before putting their investments in the hands of fund managers.
IT IS HARD TO IDENTIFY WHICH ARE THE REAL EXPERTS AND WHICH ARE JUST LUCKY IN A GIVEN YEAR.