August 21, 2014

Why Hot Mutual Funds Won’t Stay That Way

“Any investor who's read the fine print of his or her mutual fund prospectus is familiar with the phrase "past performance is no guarantee of future results," or something to that effect. Of course, very few investors ever actually read the fine print, but a recent report from the ratings agency Standard & Poor's makes a strong case they ought to.”
“The "Persistence Scorecard" is published twice a year by S&P Dow Jones Indices. It tracks the consistency of the top performing, actively managed U.S. mutual funds. Index and sector funds are not included in the sample.” Several findings in particular stand out from the most recent edition of the scorecard, released last month. The details should be enough to convince even the most loyal and diehard investors that it's time to give up actively managed mutual funds and make the switch to passive, market-matching index funds:
  • Less than four percent of the 687 funds studied from March 2012 through March 2014 managed to stay in the top quartile of performers. Only 18.66 percent of 1,372 funds studied for the same time period stayed in the top half.
  • Out of 715 funds studied from March 2010 through March 2014, only 0.28 percent stayed in the top quartile of performers. Only 4.47 percent out of 1,431 funds studied for the same time period stayed in the top half.
“In other words, even when actively managed funds perform extremely well, they’re not likely to sustain that performance for an extended period of time.” Directly quoted from John Grgurich, The Fiscal Times.  Read more at:

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