The largest funds (in terms of investor assets) are often the ones with the best track records – they don’t get big by accident. These monster funds deliver huge profits to the companies that run them, so they can afford to hire the best managers. Giant funds also tend to have lower fees because they have so many shareholders to cover fund operating costs. Sounds like a recipe for continued success.
So what is the better investment – a big successful actively managed fund or an index fund?
Morningstar takes a look back at how the ten biggest funds of 1997 in the large cap blend category did in the ensuing ten years.
Of the 10 biggest large-blend funds back in 1997, six have outperformed the majority of their rivals since October 1997. We recommended five of those funds for purchase at that time….The other four funds in that group of 10 have underperformed their typical large-blend rival since 1997. True, we did recommend all four funds at the time…"
The takeaway from this article appears to be that big funds do well (and that Morningstar seems likes recommending big funds…). But a 60% success rate is not particularly impressive.
Throwing darts at large blend funds in 1997 and falling asleep at the wheel for ten years should lead to a 50% success rate – odds are half of the dartboard funds would be in the top half of the performance curve...