Copyright 2006 Equitrend, Inc.
Approximately 75% of fund chiefs do not beat the S&P 500 year in and year out. How can a basket of 500 hundred stocks beat the majority of actively managed retirement funds? The people who manage these funds are, most of the time, brilliant folk. They are well educated and have access to the most advanced information and decision support systems internationally. So why is it that they don't outperform the S&P 500?
A Fast Test:
Here's a very crude test of management performance: Let's compare the domestic-equity hedge fund performance supplied by Morningstar against the S&P 500 index for one, three, five and ten-year periods, looking back from April 30, 1995. The S&P 500 index is a fair comparison for big, domestic companies.
Our results:
Of the 1,097 funds Morningstar covered for the 1 year period, 110 beat the S&P 500, while 987 slid short. Results ranged between 46.84% to -32.26%, while the S&P 500 attained a 17.44% return.
During the three-year period, the S&P 500 returned 10.54%, while ends in the funds sundry from 29.28% to -15.02% compounded yearly. Of the total 609 funds, only 266 beat the S&P 500.
Shifting to the five-year period, of 470 funds, 204 beat the S&P 500. Results ranged between 27.35% to -8.51%, while the index racked up 12.62%.
At a decade, only 56 of 262 funds managed to beat the index, and results varied from 24.77% to -4.06% compounded yearly against 14.78% for the S&P 500.
The fact that most funds do not beat the overall market should not be surprising. Since the bulk of money invested in the stockmarket comes from mutual funds, it'd be mathematically very unlikely for the majority all these funds to out perform the market.
The implied promise held out to investors in actively managed retirement funds is that in return for higher costs (relative to index funds), the actively managed fund will deliver superior market performance. There are a host of barriers to fulfilling this implied guarantee.
Some of the Problems are:
The larger a hedge fund gets, the more difficult it becomes to supply remarkable performance.
Though fund size runs counter to performance, fund executives have a powerful incentive to let the fund grow as big as possible because the bigger the fund gets, the more money the fund chiefs make.
Most skillful hedge fund bosses are hired away by hedge funds, where their financial rewards are greater and there are only a few restrictions on investment techniques.
By law mutual funds should be conservative, which in principle limits their likely losses. This conservative position often limits their abilities to use arbitrage, options, or shorting stocks.
Can You Do Better?
Because of the general inflexibility and limitations of most retirement funds, your investment capital isn't properly hedged against market fluctuations. In most cases, if you compared the beta of the equity exposure held in actively managed retirement funds to an equal equity exposure to the S&P 500 index, your reward/risk proportion would be less rewarding than buying an identical equity exposure to the S&P 500 index. Hence the answer's, you can do better and beat the S & P 500 by employing an effective stock market timing system.
Approximately 75% of fund chiefs do not beat the S&P 500 year in and year out. How can a basket of 500 hundred stocks beat the majority of actively managed retirement funds? The people who manage these funds are, most of the time, brilliant folk. They are well educated and have access to the most advanced information and decision support systems internationally. So why is it that they don't outperform the S&P 500?
A Fast Test:
Here's a very crude test of management performance: Let's compare the domestic-equity hedge fund performance supplied by Morningstar against the S&P 500 index for one, three, five and ten-year periods, looking back from April 30, 1995. The S&P 500 index is a fair comparison for big, domestic companies.
Our results:
Of the 1,097 funds Morningstar covered for the 1 year period, 110 beat the S&P 500, while 987 slid short. Results ranged between 46.84% to -32.26%, while the S&P 500 attained a 17.44% return.
During the three-year period, the S&P 500 returned 10.54%, while ends in the funds sundry from 29.28% to -15.02% compounded yearly. Of the total 609 funds, only 266 beat the S&P 500.
Shifting to the five-year period, of 470 funds, 204 beat the S&P 500. Results ranged between 27.35% to -8.51%, while the index racked up 12.62%.
At a decade, only 56 of 262 funds managed to beat the index, and results varied from 24.77% to -4.06% compounded yearly against 14.78% for the S&P 500.
The fact that most funds do not beat the overall market should not be surprising. Since the bulk of money invested in the stockmarket comes from mutual funds, it'd be mathematically very unlikely for the majority all these funds to out perform the market.
The implied promise held out to investors in actively managed retirement funds is that in return for higher costs (relative to index funds), the actively managed fund will deliver superior market performance. There are a host of barriers to fulfilling this implied guarantee.
Some of the Problems are:
The larger a hedge fund gets, the more difficult it becomes to supply remarkable performance.
Though fund size runs counter to performance, fund executives have a powerful incentive to let the fund grow as big as possible because the bigger the fund gets, the more money the fund chiefs make.
Most skillful hedge fund bosses are hired away by hedge funds, where their financial rewards are greater and there are only a few restrictions on investment techniques.
By law mutual funds should be conservative, which in principle limits their likely losses. This conservative position often limits their abilities to use arbitrage, options, or shorting stocks.
Can You Do Better?
Because of the general inflexibility and limitations of most retirement funds, your investment capital isn't properly hedged against market fluctuations. In most cases, if you compared the beta of the equity exposure held in actively managed retirement funds to an equal equity exposure to the S&P 500 index, your reward/risk proportion would be less rewarding than buying an identical equity exposure to the S&P 500 index. Hence the answer's, you can do better and beat the S & P 500 by employing an effective stock market timing system.
About the Author:
To get all your questions cleared up about Timing Signal, visit The Significance Of Your 401k Account To The Timing Of The Stock Market and read our featured Timing Signal programs. See more articles posted at Timing Signal.
No comments:
Post a Comment