A new study  from Dimensional Fund Advisors reviewing the mutual fund industry highlights the low probability game investors and their advisors play when they attempt to select the best active managers. A few of the interesting data points to come out of the study:

Probability of picking winning active managers:

• 19% of actively managed equity funds survived and outperformed their benchmark over the ten years ending 2013.
• 15% of actively managed fixed income funds survived and outperformed their benchmark over the ten years ending 2013.

Usefulness of successful track records as predictors of outperformance:

• Of the 28% of actively managed equity funds that outperformed over the period 2006-2010, only 34% outperformed in the subsequent three year period (2011-2013).
• Of the 11% of actively managed fixed income funds that outperformed over the period 2006-2010, only 49% outperformed in the subsequent three year period (2011-2013).

Costs as a predictor of underperformance:

• Dividing the equity fund universe into quartiles sorted by expense ratio, 9% of the bottom (most expensive) funds outperformed their benchmarks in the ten years ending in 2013, compared to 25% of the funds in the top (least expensive) quartile.
• Dividing the equity fund universe into quartiles sorted by average turnover, 11% of the bottom (highest turnover) funds outperformed their benchmarks in the ten years ending in 2013, compared to 27% of the funds in the top (least expensive) quartile.
• Dividing the fixed income fund universe into quartiles sorted by expense ratio, 6% of the bottom (most expensive) funds outperformed their benchmarks in the ten years ending in 2013, compared to 22% of the funds in the top (least expensive) quartile.

The study supports the principle that investors can put the odds of successful investing in their favor by constructing portfolios with low-cost, low-turnover index and asset class funds.