Mutual Funds Exposed! (Reason 3 of 6 – Most Mutual Funds Under Perform the Market)

One would think that because mutual funds are managed money, that they might outperform their benchmark. Or, just by chance you’d think that half the funds will outperform and half will under perform.

For the 12-month period ending December 31, 2016:

-60 percent of large-cap mutual fund managers underperformed their benchmarks.

-58 percent of mid-cap mutual fund managers underperformed their benchmarks.

-73 percent of small-cap mutual fund managers underperformed their benchmarks.

Why???

One theory is that mutual funds can underperform due to owning too many stocks. I have always been told that diversification is a good thing, but mutual funds may over-do it and hold more stocks than is necessary. Why would they do this? If a mutual fund is $50 or $100 Billion in size you have to have some place to put that money. Because of this mutual funds can have between 300 and 1000 stock holdings within their portfolio.

Most Fund Managers have their “Best Ideas”. These are the 10 to 20 stocks that they think are going to perform, the rest are used as filler. It has been proven by academic studies that this over-diversification can dilute returns.

So, it is true that too much of something can ruin a good thing.

Colby