Is This a Farce or a Con?

Morningstar, Inc., which describes itself as a "trusted source for insightful information on ...mutual funds..." has issued an illuminating report. It is entitled "The Morningstar Box Score Report" and it covers mutual fund performance through the first half of 2009.

Here's the bottom line:

For the three year period ending June 30, 2009, only 37% of active fund managers outperformed their respective indexes, after adjusting for risk, size and style.

Pretty dismal record for actively managed stock funds. How about bonds?

According to a report issued by Standard & Poor's, bond performance is worse.

With the exception of emerging market debt, a staggering 75% of actively managed bond funds failed to beat their benchmarks.

The next time your broker or advisor recommends an actively managed (I call them "hyperactively managed") stock or bond fund, the conversation should go like this:

Broker: I recommend this [hyperactively managed] stock [or bond] fund.

You: You get a commission if I follow your recommendation, right?

Broker: Of course.

You: Based on data from both Morningstar and S&P, your recommended fund is likely to underperform a low cost index fund of comparable risk, right?

Broker: Yes.

You: Is this a farce or a con?

Then hang up.

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

 

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Comments

[marinara]

Quoting Mr. Solin: "Is this a con or a farce"

No it's a goddamn shame these snakes can walk about.

[martinfrosa]

You are correct sir - active money management is a con. I knew this over 25 years ago when I graduated from Business School. You might as well believe in Santa Claus as believe that an actively managed portfolio will perform well. The really bad thing is that after-tax performance is even more horrorific. Ouch!

I am a big, big fan of Vanguard's low fee index funds for this very reason and am likely to continue to be.

[Master-T]

I love your posts Mr. Solin. Your 401k pieces were especially good and described exactly what happened at my company recently. This is yet another great piece exposing an industry that is totally reliant on misinformation and hype. Hopefully people will listen, get their money in low-cost index funds, and put these con men out of business. Let 'em get jobs in Vegas, where they belong.

[kbdoogan]

Note the "after adjusting for risk, size and style" part of the comparison............ I wonder what the percentage is without those adjustments? I agree with much of what Dan says in these columns - particularly about brokers - but you also have the face the fact that performance is king. And doing a comparison that adjusts performance based on hypotheticals is more than a little bit misleading.

[dadw5boys]

Dan, All that is missing from this Economic Crisis is the Mob of Armed men who follow the Money Man around.

It is very clear to us here on the ground far away from the Politicans and Business infighting the this banking Mafia only needs a leader and the whole USA become their Casino !

[petef59]

My co-workers and me were recently berated by two levels of management for a week of work in which we only reached a 96.5% rating in one area. Now, the fact that we are Federal (Postal) unionized workers, has much to do with this silly rating: in that; continual corporate micromanaging and harassing has been ongoing since the Bush administration. Most private industry and utilities employees I speak with also get this petty kind of treatment. All from the MBA's, Finance jokers who manage our country - yet, their own performance, ethics and outcomes are exceedingly lacking any demonstrable positive contribution to society. But, they are certain they earned those Bonus, Pay-for Peformance and Merit Pay sums. Funny, how they collect, analyze and report the data that affects their own enhanced incomes, and balk at all attempts to have oversight.