By Mark Hulbert
One good year doesn't make a trend
Don't be fooled by last year's improvement in the percentage of mutual-fund managers who beat the stock market. That ability over the long run remains as low as ever.
The occasion to remind you of these dismal odds is the recent release of investment researcher Morningstar's latest U.S. Active/Passive Barometer, updated to reflect performance in 2023. Last year, 47% of actively managed open-end mutual funds and exchange-traded funds beat their benchmarks - a marked increase over the 43% hurdle rate in 2022. Morningstar refers to the boost as a "surge."
Yet active managers haven't become better at beating the market over the long term, as Morningstar acknowledges. While the percentage of market-beating funds fluctuates significantly from year to year, the proportion beating over 10- or 20-year periods is still low.
To show that there isn't any long-term trend, I turned to my auditing firm's database of several hundred investment newsletters' track records. For each calendar year since 1981, I calculated the percentage of monitored newsletters that beat the Wilshire 5,000 Total Market Index XX:W5000FLT. There is no statistically significant trend in these yearly percentages, which have fluctuated from as high as 80% to as low as 5%.
Regardless of how high this proportion may have been in any given year, the percentage of that year's cohort beating the market eventually fell to below 20% (or even lower) the longer the period over which their returns were calculated. To illustrate, consider the newsletters my firm tracked in 1982. More than 70% of that cohort beat the Wilshire 5,000 in that year, much higher even than the 47% success rate in 2023 among mutual funds and ETFs.
Yet over the five years 1982 through 1986, just 24% of the 1982 newsletter cohort beat the market. By the time the performance window lengthened to 15 years - January 1982 through December 1996 - the percentage of this 1982 cohort beating the market had dropped to 14%.
Even that already-low percentage paints too rosy a picture. That's because many of the newsletters that were published in 1982 didn't survive until 1996. Twenty-nine percent of the 1982 group didn't survive the full 15 years, and virtually all of them were behind the market at the point they discontinued publication. Adjusting for this survivorship bias, fewer than 10% of the 1982 newsletter cohort beat the market over the 15 years through 1996.
This 1982 newsletter cohort is not unique. I chose it because it does a good job illustrating the inexorable deterioration in the market-beating percentage as we focus on a longer and longer performance period.
Not surprisingly, a similar pattern exists among mutual funds and ETFs. Morningstar calculated how many of the funds and ETFs in 2023 were able to beat their benchmarks over increasingly long trailing periods; those findings are summarized in the chart above. Over the 20-year performance horizon, the success rate is as low as 5%.
The investment implication, as it so often is, is to invest the bulk of your portfolio in index funds. Investing in an actively managed mutual fund or ETF represents a triumph of hope over experience.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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-Mark Hulbert
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