Finding Mutual Fund Managers Who Beat the Market

Yesterday, I referenced Merrill Lynch research that showed only 39% of fund managers beat the S&P500 last year.

This morning, the WSJ references Goldman Sachs research — it shows something similar. Their data showed 65% of U.S. large-cap stock funds trailed the benchmark index net of fees. (5 year average = 66%).

When they looked for funds that beat the index two consecutive years, they came up with an astounding number: A mere 10% of nearly 2000 U.S. stock funds beat their benchmark in both 2011 and 2012 (Source: Morningstar research).

This is why most people are better off putting money into inexpensive passive index funds.

If you want to at last have a fighting chance to pick a fund that actually has a shot to beat its benchmark, these 2 steps are a start:

1. Low Fees — look for funds with an expense ratio of 0.86% or below.

2. Avoid Closet Indexers — find funds with a low R-squared ratio.

The full article explains these in great detail.

I still think that for many people, especially those with portfolios under $250k, passive indexing is simpler, less expensive, and more reliable.



How to Find a Fund Manager Who Can Beat the Market
WSJ, January 12, 2013

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