By Mark Hulbert
A good year does not set a trend
Don't be fooled by last year's improvement in the percentage of mutual fund managers that outperformed the stock market. That long-term capacity remains as low as ever.
The occasion to remind you of these grim odds is the recent release of investment researcher Morningstar's latest U.S. Asset/Liability Barometer, updated to reflect performance in 2023. Last year, 47% of open-end mutual funds and Actively managed exchange-traded funds outperformed their benchmarks โ a marked increase from the 43% return rate in 2022. Morningstar refers to this momentum as a โsurge.โ
However, active managers have not gotten better at beating the market over the long term, as Morningstar acknowledges. While the percentage of funds outperforming the market fluctuates significantly from year to year, the proportion outperforming 10- or 20-year peers remains low.
To prove that there is no long-term trend, I turned to my audit firm's database of the history of several hundred investment newsletters. For each calendar year since 1981, I calculated the percentage of monitored newsletters that beat the Wilshire 5,000 Total Market Index XX:W5000FLT. There is no statistically significant trend in these annual percentages, which have fluctuated from a maximum of 80% to a minimum of 5%.
Regardless of how high this proportion was in a given year, the percentage of that year's cohort that beat the market eventually fell below 20% (or even lower) the longer the period over which their returns were calculated. . As an example, consider the newsletters my company tracked in 1982. More than 70% of that cohort surpassed the Wilshire 5,000 that year, much higher than even the 47% success rate in 2023 among mutual funds and ETF.
However, during the five years from 1982 to 1986, only 24% of the 1982 newsletter cohort outperformed the market. When the performance window was lengthened to 15 years (January 1982 to December 1996), the percentage of this 1982 cohort beating the market had fallen to 14%.
Even that percentage, already low, paints an overly optimistic picture. This is because many of the newsletters that were published in 1982 did not survive until 1996. Twenty-nine percent of the 1982 group did not survive the full 15 years, and virtually all of them were behind in the market by the time they left. to be published. . Allowing for this survival bias, less than 10% of the 1982 newsletter cohort outperformed the market over the 15 years to 1996.
This 1982 newsletter cohort is not unique. I chose it because it illustrates well the inexorable deterioration of the market's beat percentage as we focus on a longer and longer period of performance.
Not surprisingly, a similar pattern exists between mutual funds and ETFs. Morningstar calculated how many of the funds and ETFs in 2023 were able to outperform their benchmarks over increasingly longer tracking periods; Those findings are summarized in the table above. Over a 20-year performance horizon, the success rate is as low as 5%.
The investment implication, as is often the case, is to invest the majority of your portfolio in index funds. Investing in an actively managed mutual fund or ETF represents a triumph of hope over experience.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at mark@hulbertratings.com
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-Mark Hulbert
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