Monday, April 23, 2012

S&P 500 vs. Equity Mutual Funds - The Real Data

Throughout my career I have always heard that the average managed equity mutual fund does not outperform the S&P 500 Index.  I still seem to hear this about once a week on CNBC.  Though the words are strong, I have actually never had anyone show me the data to support, what has become, a generally accepted investing principle.  Naturally I am writing to share the data.  The problem is, the factual data I have collected does not support the theory that the average managed equity mutual fund lags the performance of the S&P 500.

Before I share the data with you I want to preface that I am an S&P 500 fan.  The fact is I want the S&P 500 Index to skyrocket every year.  If that happens, I do not care what is lagging or outperforming the index.  In an environment like that everyone should be enjoying a tremendous amount of prosperity.  However, that is not reality and that is why it is important to make sure that statements are accurate and the correct information is being presented.

I decided to compare the performance of the S&P 500 index to the average performance of mutual funds covering thirteen different identifiable equity asset classes.  Those asset classes are as follows:  Domestic Large Cap Value, Domestic Mid Cap Value, Domestic Small Cap Value, Foreign Large Cap Value, Foreign Mid/Small Cap Value, Domestic Large Cap Growth, Domestic Mid Cap Growth, Domestic Small Cap Growth, Foreign Large Cap Growth, Diversified Emerging Markets, Gold & Precious Metal, Real Estate and Broad-Basket Commodities.

Everyone seems to have a different definition of what duration the “long-term” covers.  When we live in a world where the average non-leveraged ETF is held for only 16 days and the average mutual fund is held for around one year, then I think it is safe to refer to looking back over the last twelve years (this century) as the “long-term”.  That is 12.3 years to be exact, or 147.67 months, or 4,494 days.  That time period is January 1, 2000 thru the markets close on Friday April 20, 2012, and is the time frame I chose to compare the total return performance of the S&P 500 Index to the total return performance of the average mutual fund.  Here is the return data:

January 1, 2000 - April 20, 2012
Total Return
S&P 500 Index
Mutual Funds
Domestic Large Cap Value
Domestic Mid Cap Value
Domestic Small Cap Value
Foreign Large Cap Value
Foreign Small/Mid Cap Value
Domestic Large Cap Growth
Domestic Mid Cap Growth
Domestic Small Cap Growth
Foreign Large Cap Growth
Diversified Emerging Markets
Gold & Precious Metals
Real Estate
Broad-Basket Commodities

As you can see from the data, only two of the above asset classes have not outperformed the total return of the S&P 500 over the last 12.3 years.  We are talking about the average performance of thousands of mutual funds.  The only asset classes that have lagged the total return of the S&P 500 for the time period examined were domestic large cap growth and foreign large cap growth mutual funds. 

My theory as to why large cap growth funds are the only asset class to lag the S&P 500 over the last 12.3 years is based on laziness and ignorance.  There’s a reason why there are a much greater number of large cap growth funds in the market when compared to the number of offerings of other asset classes.  When an institution wants to roll out a new fund and make some money managing assets, large cap growth is considered a no-brainer.  Heck, how hard could it be?  You buy a little Microsoft (MSFT), a little Intel (INTC), a little Home Depot, and you hold on.  All the other asset classes mean committing time and resources, and well that just seems like a lot of work.  Value managers have to dig deep into financial statements and determine if earnings rates and current dividend yields are sustainable.  Large cap growth fund managers can buy any big name growth stock and not worry about current or projected growth rates.  They always have the rationale of buying things based on “future” growth.  Sadly, most large cap growth managers did not buy Apple (APPL), even by accident, as a part of their no-brainer strategies. 

So the next time a financial “expert” passingly tells you that the average equity mutual fund lags the S&P 500, please make sure you ask them to clarify and quantify their position.  It is not that difficult to find the performance data.  It is all available on Morningstar’s webpage.  Up until recently I actually believed that theory, but after I stopped being lazy and dug a little deeper into the data, I was able to come up with some theories of my own based upon factual data.  What was the lesson I learned?  Stop believing everything you hear and do the work yourself.

Thank you and good luck everyone!

For a more recent view of the average mutual funds performance versus the the S&P 500 Index, please visit the following post:

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”