02.10.09

Motley Fool Champion Funds Newsletter Shows Why Actively-Managed Mutual Funds Suck

Posted in All Categories at 12:41 pm by Michael Goode

Here is how the Motley Fool Champion Funds “Aggressive” portfolio has done since inception 13 months ago (data as of today from newsletter subscriber website):

Inception Date      1/1/2008
Return Since Inception     -37.98%
+/- Benchmark     -4.79%
+/- S&P 500     -.98%
Average Expense Ratio     0.74
Average Manager Tenure     7.4 years
Average Turnover     77%

The aggressive portfolio has a 10% allocation to bonds. And yet it still underperformed the S&P 500 over one of the worst-ever 13-month periods for stocks. Also, it did all this with average turnover of 77%, making the portfolio highly tax-inefficient and thus innappropriate for taxable accounts. TMF Champion Funds’ other two portfolios are underperforming their benchmarks by about 2.9% each.

Because the expense ratio of the underlying funds is low for actively-managed funds, the underperformance relative to the benchmarks comes from the funds managers underperformance before fees (in other words, they exhibit negative skill)! Once fees and taxes are taken into account, active fund managers almost always lose (except for a few who get lucky).

If any strategy worked for picking talented mutual fund managers, Champion Funds’ strategy would work. I should know, because it is the same strategy I recommended in my defunct investment newsletter and it has some statistical evidence to support it. But there is a small probability of it working (in which case it will outperform its benchmark modestly) while there is a large probability of it underperforming its benchmark (with a decent chance of severe underperformance).

Another win for index investing.

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