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.
The real question is how have actively managed fund done against the most similar index funds. In this case the comparison is easy because the Vanguard 500 Index (VFINX) is a large cap blend fund.
Here are the eight mega-funds the article mentions and their returns* from 1997 to 2007 (a ninth, AIM Premier Equity, performed so poorly it merged into AIM Charter [CHTRX] in early 2006 and a tenth is mysteriously missing from the study):
Of the nine (including the merged fund), it appears that only two of the actively managed giant funds beat the benchmark index over the following ten years (Vanguard Institutional Index is a low fee, high minimum index fund). We’re not even looking at after tax returns, where index funds do even better due to the limited taxable distributions.
The last ten years have not been kind to mega cap weighted investors in the S&P 500: more than half of domestic stock funds have beaten the index over the last ten, five, and three years. Now that larger cap investing has come back into vogue, we can expect the S&P 500 to beat even more stock funds.
At best, giant funds perform like index funds with high fees going forward. Go with index funds or smaller, low fee actively managed funds and shy away from the giant funds everybody else is investing in. This is why our fund rating system has always punished the fat and expensive.
Go Big Or Go Index?
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.
The real question is how have actively managed fund done against the most similar index funds. In this case the comparison is easy because the Vanguard 500 Index (VFINX) is a large cap blend fund.
Here are the eight mega-funds the article mentions and their returns* from 1997 to 2007 (a ninth, AIM Premier Equity, performed so poorly it merged into AIM Charter [CHTRX] in early 2006 and a tenth is mysteriously missing from the study):
And the return of the Vanguard 500 Index:
Of the nine (including the merged fund), it appears that only two of the actively managed giant funds beat the benchmark index over the following ten years (Vanguard Institutional Index is a low fee, high minimum index fund). We’re not even looking at after tax returns, where index funds do even better due to the limited taxable distributions.
The last ten years have not been kind to mega cap weighted investors in the S&P 500: more than half of domestic stock funds have beaten the index over the last ten, five, and three years. Now that larger cap investing has come back into vogue, we can expect the S&P 500 to beat even more stock funds.
At best, giant funds perform like index funds with high fees going forward. Go with index funds or smaller, low fee actively managed funds and shy away from the giant funds everybody else is investing in. This is why our fund rating system has always punished the fat and expensive.
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