ottoman_javier wrote: ↑Wed Nov 29, 2023 2:19 pm
I have been sifting through mutual fund data on and off for the past few months through Fidelity and Schwab which give access to data of close to 10,000 mutual funds. I have tried to compare the best performing funds for the longest time scales (> 40 years) to popular index funds, that have low turnover ratios, no front/back loads or transaction fees (with the right broker
). I would like to share what I have learnt and hope to get some feedback and learn some more.
Nedsaid: Sounds to me like you engaged in quite the research project, I hope you had fun doing it. Thank you for sharing what you found.
For large cap stocks, there are funds that have beaten S&P500 consistently for over 40-50 years. Fidelity's Contrafund has beaten the market since inception in the 60s. Fidelity growth company and blue chip growth since the 80s. American century's large cap funds (TWCIX, TWCGX, TWCUX) since 70s.
Nedsaid: I can speak to these American Century Large Cap Growth funds. My very first mutual fund investment was in Twentieth Century Select which I first purchased on July 16, 1984 after I had turned 25 years old. This was purchased for a taxable account and at some point stopped adding new monies when I discovered that I had to pay Capital Gains tax on the Capital Gains Distributions even if I reinvested the money. About 1993, I stopped reinvesting the distributions and would take my distribution check each year. If I was flush, I would put the proceeds into an IRA at the same company, if not I just spent the money. I still own the fund and it has been a decent investment.
I also invested in Ultra and Growth during a time when American Century's Large Growth funds were struggling, I got discouraged with them and sold just before the funds started turning around. They have a good Large Growth team, all of these funds Select, Growth, and Ultra have been good funds but have probably trailed the Growth indexes a bit in recent years. I do own Select in a managed IRA account at American Century and it has done fairly well.
I have been informed that the S&P500 can reliably be tracked to the 1950s (even though the market can be tracked to the start of the century with some reliability), which means that some of these finds have beaten it for most of its life. In any case these funds have beaten the available S&P500 mutual funds for their entire life. Of course, they have not beaten the Russell 1000 growth index which, one can argue, is the more suitable benchmark as it targets more growth oriented stocks. But unless one is wiling to put their entire large cap portfolio into a Russell 1000 index fund, these funds have done better. I am not considering sector specific funds for this discussion but broad market funds.
Some large cap funds that have handsomely beaten the S&P500 for > 50 years, have not done well in the last 10-15 years. For new investors, their average return since inception is misleading. Two great examples of this are the popular Fidelity Magellan Fund and the Sequoia Fund. Magellan fund has beaten S&P500 by 5% annually over its life, but has mostly followed the S&P500 lately. Sequoia has done much worse lately, underperforming by around 5% in the last 10 years. This is not the case with the funds I have mentioned. they have outperformed both in the short term and since inception.
Nedsaid: Fidelity Magellan is the poster boy for asset bloat, the fund got so large that the managers could not meaningfully invest in Small Cap and Mid Cap stocks. Famed manager Peter Lynch could see what was coming and retired. Other managers came and went but could never recover the fund's former glory. It is probably a decent investment though but a simple S&P 500 Index fund would probably do a bit better.
For mid and small cap stocks, situation is more complicated to get a clear answer. I can't find index funds in the small and mid cap range that go beyond the late 1990s. Comparing a funds NAV to an index is not the same as comparing to an index fund since we need to account for expenses, reinvestment of distributions etc. Please let me know if there are small and mid cap index funds older than 30 years. Even with indices some have done better than others (SP600 small cap, Russell 2000, CSRP small cap etc). One can find quite a lot of funds that beat the corresponding indices by several percent for the past 10-15 years. In fact the small cap funds have beaten the index funds (VIMAX, VMCIX, VSMAX, SWSSX, FSDMX) by much wider margin than the large cap funds have with S&P500 but it is not clear if they had done that earlier than 2000 due to this issue. Some of these funds like (RPMGX, GTSGX, WGROX, CSMVX) have been operating for 30 years and longer and have beaten the small and Mid cap index in the last 10 years by 2-5% margins.
Nedsaid: Instead of picking active mutual funds, Bogleheads pick indexes. There are good funds in the Small Cap space with good records but hard to say that these funds can continue to outperform the Small Cap indexes. Managers come and go.
Some thoughts after looking at this data. For analysis in the short term (10-15 years), it seems that the small cap stock funds tend to outperform the relevant index with wider margins. The margins reduce with large cap funds. This makes some logical sense since small cap indices have thousands of stocks unlike SP500, and would take in a lot of garbage companies that tend to be more prevalent in the small cap than large cap. For the large cap, the growth oriented indices are not beatable like the Russell 1000 growth. Since large cap stocks form majority of a stock part of a portfolio, this would imply that most of the investment would be in index funds. But the index would have to be better than the S&P500 like the Russell 1000. If majority of a portfolio's large cap stocks are in S&P500 index, then the actively managed funds I mentioned at the beginning will have beaten it.
Nedsaid: Haven't looked at this for a while but what you found is about what I remember. It seems easier to beat the Small Cap indexes with active Small Cap funds than to do the same in the Large Cap space. Keep in mind that outperformance over many years over the indexes is often due to the fund's early success, what you often find is that in more recent years that the best of these funds mostly track the indexes, Fidelity Magellan is the perfect example.
I have floated the idea here that investors take an Active/Passive approach. Put 20% to 40% of your funds in low cost Active funds and the remaining 60% to 80% in the broad indexes. I think the future of active investment are the low cost factor funds such as are offered to individual investors in ETF form, Avantis and DFA offer these products. Active fund managers are factor investors anyways so you might as well get this as cheaply as possible. This is where I would steer people who are interested in active management.
Good candidates for active funds would be companies like Vanguard, T. Rowe Price, and American Funds. These companies have deep benches of managers and analysts. You could find good candidates at Fidelity but I haven't researched these. Both T. Rowe Price and American Funds offer ETFs that are quite similar to their actively managed mutual funds, these are available at somewhat lower costs. You mentioned American Century, they have lower cost ETFs that invest in Large Growth. Magellan is now in ETF form. Vanguard has offered low cost active mutual funds for years. John Bogle spoke highly of Dodge and Cox. If you want good active products, take a good hard look at the ETFs. I wouldn't be so worried about performance records but would focus on the management team and the costs, a big reason being is that active ETFs wont have long track records. If you have the same management team with a great long term record at a mutual fund that is also running a similar ETF, I think I would pick the ETF and save on the costs.
Let's assume a typical investment timeline for retirement of about 35 years (age 30-65). If I was retiring now and cashing out my accounts invested in S&P500 or total market index funds that perform about the same, for 35 years, I would be kicking myself for not investing with Fidelity's or American century's funds. For some of these over a 35 year time, the different in account balance would be over 2x.
Nedsaid: Again what you will often find is that these successful funds had great records early on and that most of them have essentially tracked the indexes more recently. As funds get to be successful and attract more assets, its gets harder to beat the indexes. This is true even for Warren Buffett. Take a hard look at the active ETFs at the mutual fund companies, focus on costs and the management team and this gives you a shot at beating the indexes. My first choice, where I doing this all over again would be the DFA/Avantis ETFs.
The question is, is a 55 year track record of outperformance enough to choose an actively managed fund over an index fund, noting that even the oldest index funds are younger than this? One could keep waiting for reversion to mean which has not arrived for half a century. Please let me know your thoughts on these investments and how to tackle this question.
