Most pros can’t beat the market

Market Trading EssentialsMarch 15, 2021

2 minutes read

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Monday, March 15, 2021

Most active fund managers underperform the market for 11th straight year

In any given year, it’s nearly impossible to predict what the market will do. Furthermore, it’s incredibly difficult for an individual to put together a portfolio that generates market-beating returns.

According to new data from S&P Dow Jones Indices, 60.3% of large-cap equity fund managers underperformed the S&P 500 (^GSPC) in 2020. This marks the 11th straight year that pros lagged that benchmark.

Now, this isn’t exactly news to many in the investor class. And thanks to people like Warren Buffett and Jack Bogle preaching the virtues of investing in cheaper, passively managed index funds, S&P estimates there are $11.2 trillion indexed to the S&P 500.

To be fair, many active fund managers aren’t out to just beat the S&P 500 but are also trying to offer investors risk exposures that differ from what you get by mirroring the benchmark index.

For example, there are managers offering greater exposure to high-growth tech names like the FAAMG stocks. And they probably beat the S&P in 2020. Though, managers offering greater exposure to high-growth tech names like the FAAMG stocks have been lagging in 2021 to date.

But just because they’re aiming to achieve some stated goal doesn’t mean they’re not thinking about beating the market. All of these active fund managers are regularly making tweaks to their portfolios to exploit what appear to be opportunities in an effort to generate more alpha. Also, who doesn’t want to write in their quarterly letters to clients that they beat the S&P?

Unfortunately, despite these efforts the data shows that active fund managers are more likely to underperform than outperform.

And in case you do find yourself in a top-performing fund in a given year, other S&P data shows that that fund’s outperformance is very unlikely to persist in the years that follow.

By Sam Ro, managing editor. Follow him at @SamRo