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The Best Mutual Fund Manager May Be No Manager at All

Passive funds almost always outperform


“My portfolio has disappointed me lately so I want to move my money. Who is the best mutual fund manager out there?”

This is a common gripe, but one I’ve been hearing a lot more lately. A lot of investors are getting antsy after the run-up in stock prices year-to-date in 2012, and the recent rocky patch for the stock market in April. So it’s natural that after Q1 statements have arrived and investors start looking to the rest of the year that the scrutiny has increased for managers.

So rather than point to a manager du jour, I’d like to remind all mutual fund and 401k investors of a very important fact: Active managers historically do NOT beat their benchmark index. More than half of them have fallen short in many studies dating back across many decades.

Most recently we have 2011. Over 8 in 10 human managers underperformed a passive index last year, according to S&P Indices. 84% of humans couldn’t keep pace with set-in-stone indexes like the S&P 500 or the Russell 2000.

That’s particularly galling since it wasn’t a bull market, and investors needed guidance more than ever.

“Bear markets should generally favor active managers,” S&P writes. ” Instead of being 100% invested in a market that is turning south, active managers would have the opportunity to move to cash, or seek more defensive positions. Unfortunately, that opportunity does not often translate to reality. In the two true bear markets the SPIVA Scorecard has tracked over the last decade, most active equity managers failed to beat their benchmarks.”

Of course, bull markets are ripe for underperformance too. Before last year, the worst year for manager performance had been 2006, when nearly 68% of funds were beaten by benchmark indexes. Going back 10 years, the average percentage of funds underperforming has been about 57%.

So who is the best mutual fund manager out there? I’m gonna pass on the obvious names like Pimco’s Bill Gross or Fairholme’s Bruce Berkowitz.

I’m gonna go with the stone tablets at S&P that have a boring and unchanging portfolio.

After all, you can’t argue with performance.

If you have any follow up questions, please drop me an e-mail via and I will be happy to go into more detail.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.

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