If you`d like to read our study of 306 mutual

Research Report
December 2011
FUNDX RESEARCH
Observations on Fund Selection and Long-Term Performance:
A Study of 306 Diversified Equity Mutual Funds
Key Findings
When we examined the annual and cumulative total returns of the study group
of 306 equity mutual funds, some interesting observations arose:
• Selecting funds based solely on their expenses would not lead to a winning
portfolio of funds.
• There was inconsistency of annual performance among even the best
mutual funds in the group.
• Owning funds with well-known portfolio managers was not a guarantee of
future success.
• A portfolio of funds selected and managed using our Upgrading strategy
outperformed all but one fund from the group over the long term.
• The results of the Upgraded portfolio using the 306 group were consistent
with historical results from Upgrading using our core Class 3 funds in the
NoLoad FundX newsletter over the same period.
NoLoad FundX is an investment newsletter published since 1976 by
FundX Investment Group (formerly DAL Investment Company).
Questions about the research presented here should be directed to:
Marty DeVault or Sean McKeon at issue@ fundx.com
235 Montgomery Street, Suite 1049
San Francisco, CA 94104
After we assembled this universe of diversified funds with 20+ years of daily
history, we realized it presented a unique opportunity to observe how criteria
used by many investors to select funds would have fared over 20 years.
Introduction
Our initial motivation for this study was to rigorously test variations on our
firm’s Upgrading investment strategy (see explanation on page 13) within a
relatively large group of funds with at least a 20-year daily pricing history and
corrected dividends.
The universe of available funds has changed dramatically over the past two
decades, with funds opening and closing monthly. In our investment newsletter
NoLoad FundX, for example, we list almost 300 non-sector equity mutual
funds and ETFs (categorized as Class 2 and Class 3 in our publication).
Fully 75% of the funds currently listed did not exist in their present form 20
years ago. For study purposes we compiled a list of funds with a complete
20-year track record. We widened our usual scope by including load funds
and institutional funds that are not listed in our newsletter, which is geared to
individual investors. We routinely use institutional and load-waived funds for
our managed client accounts.
By definition, the funds assembled in our study universe include only survivors.
Funds with an inception date prior to the start of our study and funds that
closed prior to the end date of the study were not included. This allowed us to
be certain that the results we obtained were valid for the entire study window.
After we assembled this universe of diversified funds with 20+ years of daily
history, we realized it presented a unique opportunity to observe how criteria
used by many investors to select funds would have fared over 20 years.
Additionally, we made some interesting observations about the consistency
of fund performance relative to the broad market over long periods. Finally,
we were able to compare the outcome of our unique Upgrading method of
selecting funds versus more conventional methods.
FundX Investment Group
A Performance Study of 306 Equity Mutual Funds
2
Fund Study Group
We looked at all of the diversified mutual funds that had a complete daily pricing
history starting on December 31, 1988. We chose this date in order to be able
to use the daily pricing and dividend data available through Investors FastTrack,
which begins in September 1988. In order to test the Upgrading trading strategy,
we made all sells and buys one day after the month-end examination date. Also,
because our Upgrading system requires 12 months of data before it can rank
funds, our analysis of the returns of the mutual funds begins on December 31,
1989.
We screened the 10,454 mutual funds and exchange traded funds (ETFs)
resident in the Investors FastTrack database to eliminate:
• Funds with inception dates after December 31, 1988
• Individual sector funds
• Individual country funds other than domestic US funds
• Emerging market funds
• Fixed income funds
• Funds that include a regular component in bonds (total return, balanced or
conservative allocation funds)
• Multiple share classes of the same portfolio
INCLUDED in our group were diversified U.S. equity funds and mature market non-U.S. equity funds. They included various styles or categories including
small-, mid-, and large-capitalizations; growth, value, and blend styles; and international, global, and domestic regions.
This screen was conducted in October 2011 with data through September 30,
2011. The remaining funds passing the above criteria numbered 306.
(Note: we originally ran this study in January 2011 with data through December
31, 2010 and found 329 funds that matched our criteria for complete records.
Every month some funds are closed by their sponsors or are merged with other
funds, to be replaced by new names. When we re-ran the study 10 months later,
with data through September 30, 2011, the number of funds was down to 306
funds, a loss of 23 names. That’s a closure rate of over 2.5 funds per month.)
3
Observations
Range of Fund Performance
The analysis period was from December 31, 1989 through September 30, 2011,
or 21.75 years. Most funds in the group achieved annualized returns between
6% and 10% for this period, with 75% of the funds falling within this range (Chart
1). The S&P 500 Index gained 7.74% for this period. Three of the 306 funds
were index funds that attempt to track the S&P 500. Of those three index funds
the Vanguard 500 Index Fund (VFINX) achieved the highest return of 7.65%
(annualized). When comparing the other funds in the group we used that fund
as our benchmark.
When ranked by performance (highest to lowest) the Vanguard 500 Index Fund
(VFINX) ranked number 155 of the 306 funds. Roughly half the funds outperformed for this period and half underperformed. If an investor had chosen a
single fund from the group at the start of the 21.75 year period, the probability
that she would have selected a fund that would outperform that benchmark over
this time was only about 50/50.
According to the Investment Company Institute, roughly half of the equity mutual
funds in existence 20 years ago have since closed or have been merged into
other funds. So, the likelihood of an investor selecting a “winning” fund at the
start of this period that would outperform the benchmark was even lower than
what we can demonstrate in the study.
Chart 1 is a series of 306 dots, each marking the annualized return of one fund
over the 21.75 year period from December 31, 1989 through September 30,
2011.
The vertical axis is the annualized gain over the 21.75 years. The funds are
listed from best performers on the left to worst on the right. The best fund had
an annualized return of 14.43% over this period and the worst one was 0.58%.
16%
Annualized Total Returns
14%
12%
10%
Vanguard 500 Index Fund, #155 of 306 funds
8%
Chart 1 graphs the
annualized returns of
306 equity mutual funds
sorted by their return
(best to worst) for 21.75
years 12/31/89 through
9/30/2011. Top 15 funds
by total return are in red.
6%
4%
2%
0%
0
50
Best
FundX Investment Group
100
150
200
Rank By Performance
250
300
350
Worst
A Performance Study of 306 Equity Mutual Funds
4
Fund Category Performance
We divided the 306 funds into quintiles (each representing 20% of the total)
based on performance rank over the 21.75 year time frame. The first quintile
consists of funds with the highest returns and the fifth quintile the lowest
returns. Table 1 shows how many funds of each quintile fell into the various
fund categories as defined by Morningstar, both as number of funds and as a
percentage of each quintile.
A disproportionate number of the first quintile of funds were in the small-cap and
mid-cap categories. Large caps clustered in the mid-quintiles, but a substantial
number of large-cap funds landed in the each of the five quintiles.
We would not invite investors to read too much into the fact that small- and
mid-cap funds excelled during this period, as winning styles change over time.
We note that not all small-cap value funds led, as shown in the tables below.
Some small-cap and mid-cap funds were rather poor performers. Selecting
fund based solely on style would not necessarily have resulted in a winning
portfolio during this period.
Table 1 Funds by Morningstar Category
Category
5
Total
1st Quintile
2nd Quintile
3rd Quintile
4th Quintile
5th Quintile
Europe Stock
4
100%
0
0%
0
0%
1
25%
2
50%
1
25%
Foreign Large Blend
13
100%
1
8%
2
15%
0
0%
2
15%
8
62%
Foreign Large Growth
4
100%
0
0%
0
0%
0
0%
1
25%
3
75%
Foreign Large Value
3
100%
0
0%
0
0%
0
0%
1
33%
2
67%
Large Blend
63
100%
9
14%
10
16%
23
37%
14
22%
7
11%
Large Growth
71
100%
9
13%
19
27%
12
17%
17
24%
14
20%
Large Value
50
100%
3
6%
9
18%
15
30%
12
24%
11
22%
Mid-Cap Blend
12
100%
6
50%
2
17%
2
17%
1
8%
1
8%
Mid-Cap Growth
29
100%
10
34%
4
14%
3
10%
7
24%
5
17%
Mid-Cap Value
6
100%
4
67%
1
17%
0
0%
0
0%
1
17%
Small Blend
11
100%
6
55%
4
36%
0
0%
1
9%
0
0%
Small Growth
15
100%
5
33%
4
27%
2
13%
0
0%
4
27%
Small Value
11
100%
5
45%
4
36%
0
0%
1
9%
1
9%
World Allocation
1
100%
1
100%
0
0%
0
0%
0
0%
0
0%
World Stock
13
100%
2
15%
2
15%
3
23%
2
15%
4
31%
TOTAL
306
61
61
61
61
62
Even the very best funds had years of underperformance.
Consistency of Performance
No fund in the group outperformed the index in all calendar years. All funds with
a complete history over this period underperformed the index a minimum of six
calendar years and a maximum of 20. (2011 is measured year-to-date through
September 30). The only fund that never underperformed was the Vanguard
500 Index Fund (VFINX) itself.
Chart 2 Study Group vs. Vanguard 500 Index
Years of Underperformance
20
15
10
5
Vanguard 500 Index
0
0
50
Best
100
150
200
250
Rank By Performance
300
350
Worst
Chart 2 graphs the number
of calendar years (1990 to
2010, plus 2011 year-to-date
through 9/30/2011) in which
each of 306 equity mutual
funds underperformed the
Vanguard 500 Index Fund.
Funds are sorted by their
return (best to worst) for
21.75 years 12/31/89 through
9/30/2011. The only fund
never to underperform is
the index fund itself. All
other funds with a complete
history over this period
underperformed a minimum
of six calendar years and
a maximum of 20. The
15 funds with the highest
returns are shown in red.
The 305 funds underperformed the benchmark Vanguard 500 Index Fund
(VFINX) an average of 11.35 of the 22 possible calendar year periods. The top
15 funds underperformed an average of 8.20 years.
FundX Investment Group
A Performance Study of 306 Equity Mutual Funds
6
Table 2 Top 15 Funds by Total Return from Group of 306
Funds 12/31/1989 to 9/30/2011 (21.75 years - 22 periods)
1
FPPTX
FPA Capital
7
2
HWSIX
Hotchkis and Wiley Small Cap Value
9
3
WGROX
Wasatch Core Growth
9
4
WAAEX
Wasatch Small Cap Growth
9
5
ACRNX
Columbia Acorn
9
6
NBGNX
Neuberger Berman Genesis
7
7
FCNTX
Fidelity Contrafund
8
8
HRTVX
Heartland Value
10
9
MPGFX
Mairs & Power Growth
9
10
PRSVX
T. Rowe Price Small Cap Value
8
11
SGENX
First Eagle Global
7
12
VPMCX
Vanguard Primecap
8
13
KAUFX
Federated Kaufmann
8
14
PRNHX
T. Rowe Price New Horizons
8
15
SEQUX
Sequoia Fund
7
Number of Calendar
Years Each Fund
Underperformed
Vanguard 500 Index
As Table 2 details, even the very best funds had years of underperformance.
The top 15 funds in this group are listed in this table, and they underperformed
the benchmark as many as 10 times. The single best performing fund for this
period, FPA Capital (FPPTX), underperformed in seven of the 22 years, nearly
one-third of the time.
Bill Miller’s Legg Mason Value Trust (LMVTX) outperformed the benchmark
16 years in a row – the longest stretch of outperformance on record. In this
21.75 year period, the fund only underperformed six out of the 22 periods. If an
investor’s goal is to beat the index as frequently as possible, this fund did that
more than any of the other 305 funds. However, LMVTX is not listed in Table 2
because it was not one of the top 15 performers. In fact, it failed to outperform
both the index and the average of the group over the entire 21.75 year period.
7
Top 15 Funds Annual Ranking
Chart 3 shows the top 15 funds for the complete period in rank order year-byyear. They are clustered at the top in the far left-hand column, indicating their
top ranking by their cumulative performance for entire 21.75 years. We then
show where these funds ranked during each 23 month period (1990-2010, with
2011 shown year-to-date to September 30, 2011). Rank is based on total return
in the calendar period compared with the complete set of 306 funds.
Year-by-year relative performance was quite varied. Only three of the top 15
funds for the long term were among the top 15 funds in 1990 (the first year of
the study). None of the top 15 long-term winners were among the top 15 annual
winners in 1993, 1998, 1999, 2001, 2005, or 2007.
Some years, the top 15 funds clustered near the top – 1991 and 2000, for
example. In other years, like 1998 and 2006, they appear mostly lower ranked.
But overall there is a wide divergence along the path to achieving the best
cumulative return over the 21.75 years.
1990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
20
40
60
80
100
120
140
160
180
200
220
240
260
280
0
20
40
60
80
100
120
140
160
180
200
220
240
260
280
300
300
Rank by Performance
0
FundX Investment Group
Chart 3 depicts the top
15 funds by long-term
performance (listed in
Table 3) ranked year-byyear in each of the 22
calendar year periods.
A Performance Study of 306 Equity Mutual Funds
8
Expenses
We can’t know future performance, but we can know costs. What if we select
funds based on cost? Management fees are a drag on portfolio returns so
it’s logical to assume that funds with the lowest fees would have the highest
long-term returns.
Most expense ratios fall between 0.5% and 2% – and considering the full range
from best to worst performers – selecting based on fees gave no indication
at all of performance. Index funds, such as Fidelity Spartan 500 (FUSEX)
and the Vanguard 500 Index (VFINX) were among the lowest fee funds, and
ranked around the middle of the group (#161 and #155, respectively).
Moreover, low expenses did not necessarily predict good performance. If
an investor selected a portfolio simply by choosing funds with the lowest
costs, the investor wouldn’t have done much better than simply buying
the Vanguard 500 Index Fund. A portfolio of the 15 funds with the lowest
fees would have had an average return of 7.7%, just 0.2% more than the
Vanguard 500 Index Fund.
Low expenses did
not necessarily
predict good
performance.
Charts 4 through 8 show different ways of looking at long-term performance compared with fund expenses.
Chart 4 Expense Ratio vs. Long-Term Performance Ranking
4.5
Chart 4: The scatter plot
graphs the distribution of
expense ratios of 306 equity
mutual funds sorted by
their return (best to worst)
for 21.75 years 12/31/89
through 9/30/2011. The 15
funds with the highest total
returns for this period are
shown in red. The expense
ratios of those top 15 funds
ranged from 0.45% to
1.95%.
4.0
Expense Ratio %
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0
50
Best
100
150
200
Rank By Performance
250
300
350
Worst
Chart 4 plots the 306 funds in rank order on the horizontal axis (left to right) from
best to worst and compares the expenses on the vertical axis from lowest to highest.
Funds with the highest expenses were more likely to underperform the benchmark.
The two funds with extremely high expense ratios at the top right of Chart 4 were
the worst performing, underscoring the evidence that excessive fees can indeed be a
drag on performance. While exceedingly high expenses were often associated with
poor performance, this wasn’t necessarily the case. The top 15 performers included
funds with expense ratios ranging from a low of 0.45% to a high of 1.95%.
9
Chart 5 Expense Ratio vs. Annualized Return
Chart 5: The scatter
plot includes a “best fit”
regression line showing a
correlation between total
return and expenses. Three
“outliers” in the group of
306 funds with extremely
high expenses are circled.
Annualized Total Return 12/31/89 - 9/30/11
16%
14%
12%
10%
8%
6%
4%
2%
0%
0.0%
0.5%
1.0%
Lower
1.5%
2.0%
2.5%
3.0%
Expense Ratio
3.5%
4.0%
Higher
Charts 5 and 6 plot the 306 funds by expense ratios on the horizontal axis
(lowest to the left, highest to the right) against their annualized returns. Here,
too, we see a correlation between higher expenses and lower returns – but not
a strong enough correlation to be useful when selecting funds. Some of the
best performers were among the higher fee funds.
Chart 6 Expense Ratio vs. Annualized Return (minus three outliers)
Annualized Total Return 12/31/89 - 9/30/11
16
14
12
10
8
6
4
2
0
0.0%
Expense Ratio
0.5%
Lower
FundX Investment Group
1.0%
1.5%
Expense Ratio
A Performance Study of 306 Equity Mutual Funds
2.0%
Higher
Chart 6: The scatter plot
includes 303 funds. It
excludes funds with expense
ratios above 2.50% from the
original group of 306 funds.
This allows us to more clearly
see the pattern formed by the
bulk of the funds. When the
three outliers are excluded
from the group the slope
of the regression line is
shallower, indicating there is
only a very weak relationship
between the two variables.
Roughly the top 20
performing funds are circled
(for illustration purposes).
Expenses among the top 20
2.5% funds ranged from 1.95% to
0.45%, and averaged 1.07%
10
Chart 7 Performance by Quintile vs. Expense Ratio
4.5
4.0
3.84
Expense Ratio %
3.5
3.0
2.5
2.0
2.01
2.06
2.00
1.87
1.5
1.0
1.07
0.5
0.45
0.0
1.00
0.16
Chart 7: 306 equity funds
are divided into quintiles
by 21.75 year annualized
performance, highest
to lowest. Bars show
maximum, minimum and
average expense ratios for
each quintile.
1.13
0.93
0.32
0.10
Highest Return Quintile
1.37
0.39
Lowest Return Quintile
In Charts 7 and 8 we divided the 306 funds into quintiles (five even groupings), first by performance in Chart 7, then by expenses in Chart 8. The
lowest ranking quintile (by performance) as a group did have the highest
expenses. But among the other 4 quintiles (80% of the sample) there was
only slight correlation between expenses and performance.
Chart 8 Expense Ratio by Quintile vs. Performance
16%
14.43%
14%
12%
12.15%
12.15%
11.77%
11.06%
10%
8%
8.10%
8.14%
7.85%
7.65%
6%
4%
4.56%
4.16%
6.97%
3.84%
3.03%
0.58%
2%
0%
11
Lowest Expense Quintile
Highest Expense Quintile
Chart 8: 306 equity funds
are divided into quintiles by
expenses lowest to highest.
Bars show maximum,
minimum and average
annualized returns for each
quintile for 21.75 years of
the study.
Star Managers
Investing with well-known portfolio managers is not an effective strategy for selecting the best long-term performers from the group of funds examined here.
Some managers did well, but others stumbled. There would have been no way
of knowing in advance which would have been winners.
Some “star” managers had stellar performance during this time frame:
• Richie Freeman of Legg Mason Aggressive Growth (SHRAX) ranked an
admirable #31 of 306 funds, with 9.80% annualized.
• Wallace R. Weitz also performed admirably. His is namesake fund ranked
#49 of the 306 funds, returning 9.45% annualized.
• Ron Muhlenkamp’s namesake fund (MUHLX) was also above average
at #83 of 306 funds, returning 8.79% annualized.
Other managers, though their names may be somewhat familiar, did not
necessarily measure up for these 21+ years:
• Bill Miller’s Legg Mason Value Trust (LMVTX) ranked #187 of 306 funds.
It outperformed the index in 16 of the 22 calendar periods, yet failed to
outperform over the full period, with an annualized return of 7.37%.
• Ken Heebner’s CGM Mutual (LOMMX) ranked #193 of 306 funds, gaining
an annualized 7.28%
• John Rogers’ Ariel Fund (ARGFX) ranked #139 of 306 funds, with a
7.83% annualized total return.
• The venerable Irving Levine has led the Copley Fund (COPLX) for over
30 years. Despite decades of wisdom, his fund ranked #280 out of 306
funds with an annualized 5.53% gain.
• Richard C. Barrett has led the Stonebridge Small Cap Growth Fund
(SBSCX) since 1979. It ranked #305 of 306 funds and returned a slight
2.66% annually.
FundX Investment Group
A Performance Study of 306 Equity Mutual Funds
12
An Alternative Strategy for
Selecting Mutual Funds: Upgrading
Upgrading Methodology
FundX Investment Group utilizes an active investment strategy called
Upgrading that entails selecting mutual funds that have recently performed well
relative to their peers, monitoring these funds and continually repositioning in
top performers.
The methodology we used for this study is consistent with that shown in our
monthly newsletter NoLoad FundX, published since 1976. It is also the same
strategy we have used to manage our client accounts for decades and to manage a series of mutual funds.
Using the 306 equity mutual funds described above as our investment “universe”
we ran a hypothetical portfolio starting on the January 2, 1990, the second
business day of 1990.
Annualized Total Return 12/31/89 - 9/30/11
16%
Chart 9 Annualized Returns of 306 Funds plus Upgraded Portfolio
Chart 9 graphs the
annualized returns of
306 equity mutual funds
sorted by their return
(best to worst) for 21.75
years 12/31/89 through
9/30/2011. Top 15 funds
by total return are in red.
Hypothetical portfolio of 15 funds, Upgraded monthly,
achieved an annualized return of 12.19% for 21.75 years
ending 9/30/2011.
14%
12%
10%
8%
6%
4%
2%
0%
0
50
Best
100
150
200
Rank By Performance
250
300
Worst
Results of Upgrading Group of 306 Funds
• Cumulative performance (12/31/1989 to 9/30/2011): 1,121.89%
• Annualized performance (12/31/1989 to 9/30/2011): 12.19%
• This Upgraded portfolio would have ranked between #1 and #2 when
compared with the 306 funds in the study group.
• It would have underperformed nine out of 22 calendar periods.
13
350
An Upgraded portfolio of funds from the study group (306 funds)
outperformed all but one fund from that group over the long term.
Criteria for Upgrading the Group of 306 Funds:
• We used the universe of 306 funds with complete pricing history for the
study window of 20+ years.
• We calculated a score for each fund consisting of an average of the fund’s
1, 3, 6 and 12 month rolling returns.
• We assembled a starting portfolio of 15 funds on January 2, 1990 based on
their score as of December 31, 1989.
• The universe of funds was re-assessed and re-ranked each month using
data through the last business day of each month.
• Funds were held in the hypothetical portfolio as long as they remained in
the top 30% of the group based on their score (a fund was sold when it fell
below #92 in the group of 306 funds).
• Proceeds from a fund being sold were re-invested in the highest ranking
fund that month which was not already held.
• We traded monthly, one day after the analysis date (first market day of
each month).
• We held each fund a minimum of three months.
The process and the results of Upgrading this group of 306 funds is
consistent with the real-world results of NoLoad FundX newsletter.
Criteria for NoLoad FundX Class 3 Upgrading:
• Class 3 is a group of open-end noload mutual funds and ETFs that are widely
available on broker platforms.
• The number of funds in the group has ranged from 98 and 161 fund over the
time period considered here. The composition of the group has changed over
time due to fund closures, mergers, and the addition of new funds and ETFs.
• Each month we calculate a score for each fund consisting of an average of
the fund’s 1, 3, 6 and 12 month rolling returns and adding one bonus point for
each period in which a fund ranked in the top 15 funds in the group.
• We assembled a starting portfolio of five funds based on one-year rankings
through December 31, 1989.
• Each month (over the ensuing 272 months) the group of funds was re-ranked
using data through the last business day of each month.
• Funds were held so long as they remained in the top five of the group based on
their score.
• Proceeds from a fund being sold were re-invested in the highest ranking fund
that month which was not already held.
FundX Investment Group
A Performance Study of 306 Equity Mutual Funds
14
Results of NoLoad FundX Class 3 Upgrading:
• Cumulative performance (12/31/1989 to 9/30/2011): 922.14%
• Annualized performance (12/31/1989 to 9/30/2011):
11.28%
• This Upgrading portfolio would have ranked between #11 and #12 when
compared with the 306 funds in the study group.
• It would have underperformed nine out of 22 calendar periods.
Individual investors who wish to follow the Upgrading discipline can obtain
the fund rankings in monthly issues of the NoLoad FundX newsletter. More
information on the methodology and historical performance of this real-time,
real-world portfolio is available at: www.fundx.com.
Conclusions
Investors attempting to select a portfolio of mutual funds that they can buy and
hold for the next 20 years (a reasonable time horizon for equity investments) face
a daunting task. By looking at a universe of diversified funds that investors may
have considered 20 years ago we were able to examine how some of the strategies
investors use to select portfolios would have fared. The likelihood that an investor
could have chosen the best performing fund at the start of the period is slim. An
investor’s likelihood of selecting a group of funds that would have outperformed the
broad U.S. equity market is also low. In fact, it was impossible to anticipate
even which funds would even have remained open for this 20+ year period.
This study includes only “survivors,” and does not include funds that were in
existence at the start of the period but later closed. If we were to assume there
would have been twice as many funds for investors to choose from, and if we
were to further assume that all of the funds that were de-listed in the past 20
years would have underperformed the Vanguard 500 Index Fund, (we have no
way to know how they would have performed) the number of outperformers
would have fallen from 50% to 25% of the total, making it even more of a
challenge to have chosen a portfolio of winning funds.
• Selecting funds based solely on their expenses would not necessarily
lead to a winning portfolio of funds.
• In the group of funds examined here, except for funds with the highest
expenses (highest quintile expense ratios), the level of a fund’s expense
was not predictive of future performance.
Owning funds with well-known portfolio managers was not a guarantee of
future success. While some of the better known managers outperformed the
Vanguard 500 Index Fund for the 20+ year period examined, many did not.
Even the funds that performed best over the entire 20+ year period experienced
long interim periods of underperformance along the way. The best performing
15 funds underperformed an average of eight of the 22 calendar years. For
15
investors to have realistic expectations, they should recognize that long-term
outperformance always includes periods of disappointment.
An Upgraded portfolio of funds from the study group outperformed all but
one fund from that group over the long term and by extension, every other
possible portfolio of 15 funds, including the top 15. A portfolio of 15 funds from
this universe, reassessed monthly by their trailing 12-month returns and then
Upgraded would have produced a return that ranked between #1 and #2 in
this universe for the entire period. It follows that any combination of 15 funds
in the study group, even the best 15 of the group, would have underperformed
the Upgraded portfolio of 15 funds.
• Selecting funds that will perform well in the distant future is difficult. A
more effective approach is to attempt to select funds that might perform
well in the near future, and to continually reassess over time.
• Investors seeking to outperform the S&P 500 over the long run should
be willing to repeatedly reassess their initial selections and not fall into
the trap of “set it and forget it.”
FundX Investment Group
A Performance Study of 306 Equity Mutual Funds
16