'Dumb' Investors Turn Out To Be Shrewd
NEW YORK (TheStreet) -- Do investors buy the wrong funds? Plenty of academic researchers think so. The researchers say that many investors pick poor-performing actively managed funds. Instead of trying to beat the benchmarks with actively managed funds, most investors would do better by sticking with index funds, the academics argue.
But a new study by Morningstar suggests that investors aren't so dumb after all. According to the latest data, typical investors have achieved competitive results. "Investors have done a good job of picking active funds," says John Rekenthaler, Morningstar's vice president of research.
Rekenthaler says that the typical academic study looks at a group of 200 or so actively managed funds. Most often two-thirds or more of the funds failed to outdo their benchmarks during the previous 10 years. While the data in the studies may be accurate, the results don't necessarily reflect the experience of the typical investor, says Rekenthaler.
The problem is that most active funds have few shareholders and a tiny amount of assets. On average, the smallest funds have high fees and poor returns. In contrast, many big funds have low fees and high returns. The small funds only serve a limited number of investors, but the academic studies give equal weight to all funds -- regardless of their size. As a result, the dismal performance experienced by a small number of investors tends to reduce the average returns.To appreciate the distortion, consider a simple study of the 10-year returns of the large blend funds tracked by Morningstar. Of the 353 funds with 10-year records, 149 surpassed the S&P 500 and 204 trailed the benchmark. By that measure the active funds appear to have failed investors. But many of the losing funds did damage to only a small number of investors. Follow TheStreet on Twitter and become a fan on Facebook. Among the poor performers was Concorde Value (CONVX), which has $10.4 million in assets. The fund charges a fat expense ratio of 2.03% and trailed the S&P by 2.1 percentage points annually. Among the winners was American Funds Fundamental Investors (ANCFX), which has $47 billion in assets. The fund charges an expense ratio of 0.64% and outdid the S&P by 2.6 percentage points annually.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV