Do Winners Keep Winning?

The Search For Stock Fund Winners

The size of the mutual fund landscape masks the fact that many funds disappear each year, often as a result of poor investment performance. Investors may be surprised by how many mutual funds become obsolete over time. Funds tend to disappear quietly, and underperforming funds—especially those that do not survive and are no longer available for investment—receive little attention.

Non-surviving funds tend to be poor performers. Certainly, investors would like to identify in advance which funds will become obsolete and avoid them. But the reality is that everyone must choose from a universe that includes funds that will not survive the period, and an accurate depiction of the fund selection challenge requires performance data from both surviving and non-surviving funds.

Some fund managers might be better than others, but they are hard to identify using track records alone. Stock market returns contain a lot of noise, and impressive track records often result from luck.

Few Equity Funds Have Survived and Outperformed As of December 2018

The Harsh Statistics

5 Years

  • 2,863 stock funds @ beginning of period
  • 79% survive over that period
  • Only 29% outperform

10 Years

  • 2,944 stock funds @ beginning of period
  • 58% survive over that period
  • Only 21% outperform

15 Years

  • 2,587 stock funds @ beginning of period
  • 48% survive over that period
  • Only 17% outperform

Investors likely want to do more than just pick a fund that survives. Most people want funds that will outperform their benchmark. Yet, the exhibit above shows the low chances of picking an outperforming, or “winning,” equity fund. For the 15-year period through 2016, only 17% of equity funds survived and outperformed.

Over both short and longer time horizons, the deck is stacked against investors seeking outperforming equity funds.