26 Jun Same Old Same Old
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“Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”
Jack Bogle
Each year, Dimensional Fund Advisors (DFA) analyses the returns from a large sample of US-domiciled funds, the objective being to assess their performance against their respective benchmarks. They have just published their 2019 report which provides data to the end of 2018.
DFA analysed the performance of 4,576 funds, of which 1,460 were fixed income funds, 1,090 were international equity fund and 2,026 were US equity funds.
The funds analysed represent $8bn of investor assets.
So, what did their analysis tell them?
Firstly, once again, very few of the funds which survived the periods analysed managed to beat their benchmark index:
Past performance is no guarantee of future results
The sample includes funds at the beginning of the 10-, 15-, and 20-year periods ending December 31, 2018. Survivors are funds that had returns for every month in the sample period. Winners are funds that survived and outperformed their benchmark over the period. US-domiciled open-end mutual fund data is from Morningstar.
Source: Dimensional Fund Advisors
Secondly, in instances where outperformance of a benchmark has been achieved, the outperformance does not persist (which begs the question, was the outperformance due to skill or luck on the part of the fund manager?):
Past performance is no guarantee of future results
At the end of each year, funds are sorted within their category based on their five-year total return. The tables show the percentage of funds in the top quartile (25%) of five-year performance that ranked in the top quartile of performance over the following five years. Example (2014–2018): For equity funds ranked in the top quartile of performance in their category in the previous period (2009–2013), only 25% also ranked in the top quartile in the subsequent period (2014–2018). US-domiciled open-end mutual fund data is from Morningstar.
Source: Dimensional Fund Advisors
Thirdly, costs matter:
Past performance is no guarantee of future results.
The sample includes funds at the beginning of the 10-, 15-, and 20-year periods ending December 31, 2018. Funds are sorted into quartiles within their category based on average expense ratio during the sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile for each period. Winners are funds that survived and outperformed their benchmark over the period. Losers are funds that either did not survive or did not outperform their respective benchmark. US-domiciled open-end mutual fund data is from Morningstar.
Source: Dimensional Fund Advisors
And lastly. The more a fund trades the greater the impact on returns:
Past performance is no guarantee of future results.
The sample includes equity funds at the beginning of the 10-, 15-, and 20-year periods ending December 31, 2018. Funds are sorted into quartiles within their category based on average turnover during the sample period. The chart shows the percentage of winner and loser funds by turnover quartile for each period. Winners are funds that survived and outperformed their benchmark over the period. Losers are funds that either did not survive or did not outperform their respective benchmark. US-domiciled open-end mutual fund data is from Morningstar.
Source: Dimensional Fund Advisors
Summary
The results of DFA’s 2019 report pretty much mirror those from previous years.
Past performance is no guarantee of future results.
Categorization determined by Dimensional using Morningstar data. The sample includes funds at the beginning of the 20-year period ending December 31, 2018. Each fund is evaluated relative to its respective primary prospectus benchmark as of the end of the evaluation period. Surviving funds are those with return observations for every month of the sample period. Outperforming funds are those that survived and whose cumulative net return over the period exceeded that of their primary prospectus benchmark. US-domiciled open-end mutual fund data is from Morningstar.
Source: Dimensional Fund Advisors
The takeaways for investors:
- Markets are – largely – efficient. They are a good indication of the aggregated views and knowledge of all market participants. Outperforming your benchmark is hard – few funds achieve it
- IGNORE PLATFORM ‘BEST BUY’ LISTS LIKE THE PLAGUE. You are unlikely to have a successful investment experience if you base your investment choices on picking the top performing funds from the recent past. Don’t be seduced by a few good years of outperformance – few fund managers manage to maintain it consistently (and when they do it’s virtually impossible to tell whether that’s down to skill or luck). Trying to pick those special few in advance is a game of chance and you may have to kiss an awful lot of frogs before you find your prince (assuming you ever do
) - There is certainly an element of underperformance that can be attributed to high fees. Costs matter – whether it’s the fees the fund manager charges to manage the fund or the associated fees created from excessive trading within the portfolio, the more you pay in fees, the lower the return that’s available to you.
As the late, great, Jack Bogle once said:
“Don’t look for the needle in the haystack. Just buy the haystack.”
Carolyn