The names of fund managers don’t usually trip off the public tongue, but over the past few weeks Neil Woodford has become a household name. This is not for positive reasons. He has become a symbol of hubris – a fund manager who, emboldened by a record of success at outperforming his peers over a number of years, struck out on his own. The funds bearing his name attracted huge numbers of fans, but alas, his Midas touch seemed to desert him. After months of underperformance, there was a run on his funds – leading to one of them being frozen last month, blocking investors from cashing out.
It is a grim story, but is Mr Woodford really that unusual in underperforming the market? He may have done especially badly – his Woodford Patient Capital Trust, for example, is down 27 percent over 12 months compared with a fall of 3 percent for the FTSE all-share index – but he is hardly untypical in delivering a miserable performance. Three years ago Standard & Poors looked into the performance of US fund managers over one, five and 15 year periods. Its findings were remarkable. Over 12 months (which was the calendar year 2016), 66 percent of actively managed funds had underperformed their benchmark index. The same was true of 89.4 percent of midcap funds and 85.5 percent of small cap funds.
Had they done any better over a longer period? Had they hell. Over five years, 88.3 percent of large cap funds had underperformed their index, as had 90.0 percent of midcap funds and 96.8 percent of small cap funds. Over 10 years the picture was even worse: 92.1 percent of large cap funds had underperformed, as had 95.6 percent of midcap funds and 93.2 percent of small cap funds. The longer you held your money in an actively-managed fund, in other words, the worse you seemed to do compared with putting your money in a simple tracker fund.
It seems a damning indictment of the fund management industry, but then again is it really all that surprising? Funds hold such a large proportion of the stock market – 80 percent of stocks in the S&P 500 index, for example, are owned by institutional investment – that they would struggle, as a whole, to outperform the market by much. In effect, they are the market. In contrast to passively-managed funds, however, the performance of actively-managed funds is compromised by higher charges. All those stock-pickers need to be remunerated – quite handsomely as it turns out. Consequently, a majority of funds are doomed to underperform the market.
A few will outperform, but the moral from the Woodford saga is that the best fund managers’ luck or judgement – or maybe a mixture of both – can’t be guaranteed to last. For most of us, we would be better off simply tracking the market.