We can outperform the marketPrint This Page
In 2011, the USA Today reported that "Only 4% of US Stock Funds have beaten the actual performance of the S&P 500 over the last 10 years." Let that sink in. 96% of actively managed funds didn’t provide any “performance premium” to the benchmark from which it is pegged.
Financial entertainers continually speak of a mythical mutual fund that will produce a 12% annual rate of return "over the long haul." This is a stark contrast to the data. Dalbar, one the nation's largest research firms, found that actively managed mutual funds have only yielded returns of 3.6% over a twenty year period between 1990 and 2010.
YESTERDAYS WINNERS, TOMORROWS LOSER
Many times clients will own or look to own only 5 star mutual funds thinking because of their top rating, which is based on past performance, that they must be good. Lets take a look at the data. During the bull market period between 1993-2000, the total return on Morningstar’s top-rated U.S. funds averaged +106% vs. the market which was up + 222 (Wilshire 5000 Equity Index). That’s right. The market index produced twice the returns of the top 5 star funds. What’s more, these funds carried a relative risk (measured by standard deviation vs. the total market) of 1.26. This means, the top funds captured only 48% of the market’s generous reward while at the same time assuming 26% more risk. This is hardly a tribute to the staying power of the stars.
SO WHAT DRIVES PORTFOLIO PERFORMANCEClick to zoom.
According to one study, asset allocation is 91.5% of the reason behind portfolio performance. Less than 5% has to do with the specific underlying security chosen.
Dynamic asset allocation strategies are based on the principle that, for consistent investment performance, actively allocating capital to the most attractive, risk adjusted asset classes - while avoiding the least attractive areas - may be more effective than attempting to select the historically “best performing” stock or bond manager or mutual fund. In our opinion, the most important part of investment management is deciding how much capital to allocate to each asset class and often more importantly, which asset classes to avoid.