Picking mutual funds is tricky business. That’s why most individual fund investors underperform the S&P 500 index. But in theory it should be easier than choosing stocks. The expert fund managers are doing the difficult work of picking the stocks to buy and sell. Investors just have to pick the right pickers.
There are dozens of reasons a mutual fund that had been a top performer can suddenly stop performing well. Professional fund analysts exist to look beyond the mere data and do actual fund manager interviews and additional research. Morningstar, the world’s premier mutual fund research company, has a sea of analysts keeping tabs on the growing (and growing….) list of funds. The job of these analysts is to choose the cream of the fund crop.
Morningstar recently updated the performance of their fund analyst picks. At first blush, the results look quite good.
As their director of mutual fund research concluded, “I'm pleased to see that our picks delivered superior returns.” The test was relatively simple: “Basically, we compare each fund with its peer group and ask whether it outperformed its peer group during the time when it was a pick.” In other words, if a fund analyst picks Super Duper Large Cap Value Fund as a large-cap value fund pick, does it beat the returns of most of the large-cap value funds going forward?
“For the trailing five years, it's 65%.” Not bad. That is, until you compare Morningstar analysts’ performance to some alternatives.
