March 16, 2015

A World Without Stock Picking Skill – Revisited

In a follow up to an S&P Dow Jones Indices Study from the summer 2014 “Does Past Performance Matter? The Persistence Scorecard”, a New York Times article takes a look at the performance of the two “winning” mutual funds from the 2014 study. Winning, in this context, means that the two funds performed in the top 25% of all actively managed domestic mutual funds in five consecutive twelve month periods ending March 2014. Briefly recalling the findings of that study, only two funds out of 2,862 were able to achieve this feat, strongly suggesting that predicting which active funds will outperform the market in a given period is very unlikely. In fact, less likely than if we knew with certainly that stock picking skill did not exist.

In the New York Times follow up article, the author looks at how the two winners performed over the following nine months. Surprisingly (or not), the funds that offered the best argument for using active management based on the S&P study, underperformed in the period following their coronation.

The AMG SouthernSun Small Cap fund and the Hodges Small Cap fund were in the fourth (worst) and third (second-to-worst) quartiles respectively for the nine months ending December 2014.

Picking actively managed mutual funds in an attempt to outperform the market is truly a fools errand.  Save your time and money and build a diversified, low-cost portfolio of index funds….