Massacre of the Stock Pickers

Investors who use index funds to invest in the stock market usually do better than stock pickers. That's become conventional wisdom.

According to new 15-year data in SPIVA's 2016 scorecard of stock fund performance, "usually" should be changed to "almost always."

Fewer than one large-cap stock fund in ten matched or beat its benchmark over the last fifteen years. More than 92% underperformed. 

Some say indexing itself has dulled the price moves of large caps, making stock pickers' job harder. Perhaps the pickers did better with mid caps? No, they did worse. A whopping 95% of mid-cap funds underperformed. So did 93% of small-cap funds.

Note that some mid-cap and small-cap funds may have beaten the S&P 500 even though they fell short of their more challenging benchmarks.

If actively managed mutual funds can't  beat the market, can highly-compensated hedge fund managers do better? That's the theory Warren Buffett put to his now famous test.  He bet that, over ten years, Vanguard's low-expense S&P-500 index fund would outperform a portfolio of five funds of funds, invested in more than 100 hedge funds. After nine years the results are clear: Another massacre of the active investors.

Buffett observes that the defeat was virtually pre-ordained. Some 60% of the funds-of-funds' gains were paid to the hedge fund managers and fund-of-fund packagers.

•

As long as "nobody wants to be average," active stock picking will live on. Hope springs eternal, as The Wall Street Journal($) reports: Active Managers Stage a Comeback.