The Myth of Outperforming Funds | Common Sense Investing with Ben Felix

TL;DR

Investing based on past performance is unreliable due to survivorship bias and the lack of evidence for skilled or informed fund managers.

Transcript

A financial advisor will never sit down with you and show you a list of funds that have performed poorly. That is not likely to lead to a sale. This simple truth leads to a much larger issue that affects the choices that investors make. In 2006, there were 90 Canadian equity mutual funds in Canada. At the end of the decade ending December, 2016, on... Read More

Key Insights

• 🥺 Survivorship bias causes investors to only see successful funds, leading to a distorted view of performance.
• 🍝 Studies consistently show that past performance is not an accurate predictor of future results.
• 👣 Impressive long-term track records do not guarantee future outperformance.
• ❓ Identifying skilled fund managers before they start to underperform is difficult.
• 🍝 Relying solely on past performance when selecting investments can be misleading and risky.
• 👣 A financial advisor's focus on funds with great track records does not ensure future success.
• 🧑‍🏭 Investors should consider additional factors beyond past performance when evaluating investments.

Questions & Answers

Q: Why is relying on past performance a problem for investors?

Relying on past performance can be misleading due to survivorship bias, as investors only see successful funds while missing those that have performed poorly and closed down. This distorts the overall performance picture.

Q: Are active fund managers more likely to outperform?

Studies like Carhart's 1997 paper and Fama and French's 2009 paper show that there is little evidence of skilled or informed mutual fund managers. Outperformance is mostly attributed to luck rather than skill.

Q: Can funds with impressive long-term track records be trusted?

Long-term track records are not reliable indicators of future performance. Examples like the 44 Wall Street fund, Lindner Large Cap Fund, and Miller's Legg Mason Value Trust Fund demonstrate that funds can have impressive periods followed by significant underperformance.

Q: How can investors identify winning managers before they start to lose?

It is challenging to identify winning managers in advance. Past performance alone is not sufficient, and it is important for investors to consider other factors such as fund strategy, fees, and fund manager turnover.

Summary & Key Takeaways

• Many mutual funds that perform poorly eventually close down, leading to survivorship bias where only successful funds are visible to investors.

• Studies and real-world examples show that past performance is not indicative of future results in mutual fund investing.

• Skilled managers may be mistaken for luck, and funds with impressive long-term track records can still underperform in the future.