Risk Latte - A Prayer for Mutual Funds

A Prayer for Mutual Funds

Rahul Bhattacharya
Jun 20, 2005

Numerous research have confirmed that most mutual fund (long only) managers cannot beat the market indexes. A study by Robert, et al (2000) finds that for the 10-year period from 1988 to 1998, 86% of all 355 analyzed fund managers underperformed the Vanguard 500. After capital gains and dividend taxes, even 91% of the fund managers underperformed.

For a 15 year period from 1983 to 1998, 95% of the fund managers underperformed the Vanguard 500 and for a 20-year period from 1978 to 1998, 86% underperformed.

This makes us wonder why individuals bother investing in mutual funds. They are much better off punting directly on the indexes via exchange traded funds, or simply buy stocks themselves. For if one has to pray to make money, it is certainly better praying for your own performance rather than a mutual fund manager's performance.

This shows that financial journalists are perhaps, the biggest analysts of all.

(Taken from: Credit Derivatives by Gunter Meissner, Blackwell Publishing 2005).

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