BOSTON -- Managers of stock mutual funds had an unusually tough time beating the market last year, with fewer than one in five achieving that goal, a study found. That's the lowest number in the 10 years the study has been conducted.
About 84 percent of U.S. stock funds that are actively managed, rather than passively tracking an index, underperformed versus the Standard & Poor's indexes representing the market segment the funds invest in. That's according to S&P Indices, which on Monday released its 10th annual fund performance scorecard.
The market researcher found that fund performance was better over the past several years than in 2011, although a majority of funds still fell short. Over three years, from 2009 through 2011, about 56 percent of stock funds underperformed relative to S&P benchmarks. Over five years, 61 percent underperformed.
Going back 10 years, the average percentage of funds underperforming has been about 57 percent. Before last year, the worst year for manager performance had been 2006, when nearly 68 percent of funds were beaten by benchmark indexes.
Over the last 10 years, S&P says a majority of funds beat the market in just four times. The best year for fund performance was 2009, with 58 percent outperforming.
S&P found that funds specializing in growth stocks were the biggest underperformers last year. Growth stocks are priced high relative to the earnings of the underlying company because investors expect them to grow more rapidly than lower-priced value stocks. S&P found that nearly 96 percent of large-cap growth funds – those investing in stocks with large market values – underperformed their S&P benchmarks last year. In contrast, managers of large-cap value funds fared much better, with just 54 percent underperforming.
More often than not, a majority of funds underperform because returns are reduced by investment fees to cover fund operations, including costs to pay managers and analysts who support them. Those fees are difficult to offset, even if a manager is a strong stock-picker. At actively managed funds, expense ratios typically range from 0.5 percent to 2 percent. That's the amount investors pay each year, expressed as a percentage of a fund's assets.
Index funds charge lower fees – as little as 0.06 percent at some funds – because they don't rely on professionals to pick stocks. Index funds are designed to track an index, delivering investment returns that are slightly smaller than the benchmark to account for fees covering operations.
There are, of course, many examples of fund managers whose investment-picking skills earn their investors bigger returns than their benchmark indexes. But a wealth of research shows the ranks of such star managers are relatively small. And their record of outperformance is typically fleeting measured against the decades needed to save for retirement.