The phrase “beating the market” can be defined as earning returns that outperform the gains of a particular benchmark or index such as the S&P 500 Index. Fund managers are supposed to be experts in timing the market. They’re also supposed to have strategies in place to generate profits under any market condition. More importantly, many fund managers enjoy the support of a team of financial experts who can provide valuable insights as well as the latest research.
On paper, fund managers are supposed to consistently outperform the market because they have certain skills, strategies, and resources. These qualities put them way ahead of retail investors who rely on basic technical or fundamental analysis. However, studies reveal that most fund managers can’t even beat the market.
Most Active Managers Fail to Outperform the S&P 500 Over a Long-Term Investment Horizon
Fund managers generally charge two types of fees for investing their clients’ money. The first type is the total assets under management fee or an annual expense ratio. It usually ranges from close to zero to four percent, or even higher in some cases, per year. For many, this fee is acceptable. The second type of fee is the capital gains fee. Investment funds often charge 20 percent of those gains.
In short, you’re paying these managers regardless of their performance. Perhaps this is one of the reasons why most funds consistently fail to beat the market over the long-term.
According to a report released by the S&P Dow Jones Indices, 64.5 percent of large-cap funds underperformed the S&P 500 in a span of a year. The number gets worse as you stretch the investment window. Over a 10-year period, 85.1 percent of active managers were beaten by the index. That number goes up to 91.6 percent over a 15-year investment horizon.