Last Updated on January 1, 2024 at 11:59 am
Over the past few years, freefincal has regularly reported how hard it has been for Indian fund managers to beat the Nifty/Sensex and the Nifty Next 50. Did you know that 582 US large cap mutual funds have outperformed the S&P 500 over the last ten years! In this article, we present some results from Morningstar’s premium mutual fund screener.
There are 6471 funds listed under “All US equity”. Out of these, 3474 of them have an equity style box label of “large”. This means they are predominantly large cap funds making the S&P 500 total returns (TR) an appropriate benchmark. The last 10-year trailing returns of the S&P 500 TR is 14.02%. This is the bare index return (no expenses/taxes).
As of March 26th 2021, 582 large cap funds have a 10-year trailing return > 14.02%. That is, only 16.75% of US large cap funds have outperformed the index over the last 10 years after accounting for “management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets”. Please note on top of this, entry and exit loads will have to be factored in!. This could reduce returns by 1.5 %to 2%.
The Morningstar tool has a way to account for this, but at the time of writing, their Load-adjusted return > index return screen” presents more funds than their “trailing returns > index return” screen. This is baffling, to say the least, so we will not use load-adjusted returns for this study.
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Cut to the Indian scenario: out of the 22 active large cap funds with a ten-year history, only 11 have beat Nifty 50 TRI returns of 11.24% over the last 10 years (26th March 2021). Please note, ten years ago, there were no direct plans. And five years ago, the number of active large cap funds with a 10-year history was only 14 (out of which 9 beat the index over 10 years)! Today the number of active large cap funds is 27. The question active large cap fund investors should ask is, how many are then are likely to beat the index over the next 10 years and if the fund they hold would be one of them.
Also, see:
- Active mutual funds struggle to beat Nifty 50 for the last seven years!
- Only four midcap mutual funds have outperformed Nifty Next 50 consistently.
- Only these 3 Small Cap MFs have outperformed Nifty Next 50 consistently.
Back to the US scene. Why is the S&P 500 so hard to beat? Is it because of just a few stocks calling the shots in the index? Yes, that, by definition, is how a market-cap weighted index would behave. These are some historical top 10 S&P 500 stock weights.
A Morningstar UK report says, “Just 90 companies out of almost 26,000 companies on the US stock market have delivered half of the returns over 90 years”. So opportunities are few, and most fund manager bets are likely to fail.
From our earlier reports, readers may appreciate the same situation that prevailed in India from later 2017 to March 2020 when only a few stocks propped up the Nifty while the other market segments (mid cap, small cap) were moving south: Return difference of Nifty 50 vs Nifty 50 Equal-weight index at an all-time high! Also, see: Nifty 50 equal-weight index surges past Nifty 50 due to market rally.
Then there is the survivorship rate to worry about for at least US funds. Only about 40-50% of funds in many categories survive for more than 10 years. This can result in additional taxes and loads for the investor, further reducing their returns.
Let us round out the discussion by considering the medium and small cap segments of US equity. Out of the 6471 funds listed under “All US equity”, 1314 of them have an equity style box label of “medium”. The S&P Midcap 400 TR last 10Y trailing return is 11.43%. Only 429 funds (32.6%) have a 10 -year trailing return > 11.43%.
There are 1664 funds with an equity style box label of “small”. The S&P SmallCap 600 TR last 10Y trailing return is 12.61%. Only 248 funds (14.9%) have a 10-year trailing return > 12.61%. Also, notice that the S&P 500 has outperformed the midcap and smallcap indices.
To state the obvious, a low-cost passive fund tracking the S&P 500 is the simplest option for the US investor. You would still see “gurus” like Dave Ramsey claim it is easy to find an active fund that can beat the market (guess why?!). It is not easy. It is trivial to do so!
Anyone can look at past data and list the outperformers. The questions are, (1) how many of these outperformers will survive for the next ten years? (2) Even if they survive, will they be able to beat the market? No one knows, but when most active funds fail today, the odds for tomorrow should be slim.
That said, a level-headed approach and outlook are necessary for passive investors. We discuss this in the next article.
Note: The results presented above for the US market were taken from the Morningstar premium fund screener using index returns from spglobal.com. The considerations used in this study may be different from those in other studies, active vs passive study. The author is not intimately familiar with said fund screener’s features or the terminology and rules associated with the US mutual fund industry. Any discrepancies may be brought to the author notice via email: freefincal at Gmail.com.
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