I recently came across a U.S. News article from 2010 titled “The 100 Best Mutual Funds for the Long Term”. 27 of the funds are “large cap” and comparable to the S&P 500. I know from experience and various studies that actively managed mutual funds typically trail passive index funds, but I validate this every chance I get and this was a great chance. These aren’t just any mutual funds, according to U.S. News they’re the “best”, chosen “Using our exclusive U.S. News Score”.
I computed the performance of the 27 funds from May 20, 2010 (the day after the article was published) through August 31, 2015. The results weren’t surprising. The average fund returned 88% over the period. Impressive until you realize an S&P 500 index fund returned 104%. In other words, If you would have invested $100,000 spread evenly across the 27 funds you would have $16,000 less than what you would have earned in an index fund. If $16,000 is meaningful to you, then we should talk.
Only seven funds beat the index fund, by just 0.8% annually. 21 losing funds trailed the index fund by 2.8% on average. The best fund topped the index by 1.9%, while the worst trailed by 5.7%.
It gets worse. Many of these funds charge a “load” – a fee to buy the fund in the first place. Often this fee is around 5%, so you start out 5% behind from day one with some funds. The effect of the load fee is not reflected in the performance numbers.
Actively managed mutual funds charge higher fees then passively managed index funds, and they rarely overcome this added burden. This U.S. News list is also a great example of the risk of “performance chasing”. U.S. News chose the funds based on the fact that they had performed well in the past, but this is a poor indicator of how something will do in the future.