Wall Street is a selling machine, and investors are constantly hearing about spectacular gains from this or that fund or money manager or investment vehicle. Even if these reports are true, they may not be sustainable, may entail excessive risk, or may be “cherry picked” from a much broader set of funds.
But investors do need to have realistic expectations about the returns money managers can deliver. Where can investors get credible, real-world, fully comparable performance results for portfolios over a lengthy period of time? An excellent source is the websites of major fund families. We selected Fidelity Investments, the highly respected Boston fund group, home of such legendary stock pickers as Gerry Tsai, Ned Johnson, and Peter Lynch. We identified all the funds that were designated “Large Cap” by Fidelity and that had a ten-year annual rate of return posted. In addition to twenty-six actively managed funds, representing a wide variety of styles ranging from “growth” to “value” to “export oriented” to OTC oriented, we included the index fund that mimics the S&P 500. The table below shows the annual return of these 26 funds over the past ten years, with the index fund in bold. The results speak for themselves, but a few points stand out:
- As a group, the actively managed funds pretty much matched the S&P 500, with 12 beating the S&P 500 index fund and 13 lagging it. Their average performance was 4.16% vs. 4.08% for the index fund.
- On a more positive note, 5 funds beat the index by over 200 bps while only 2 lagged the index by over 200 bps. This reflects good risk control by Fidelity.
- Clearly it is difficult to beat the S&P 500 by a lot over a long time period. If you had a million dollars to invest, and you decided to invest $200,000 in five different Fidelity funds, and you were smart or lucky enough to select the five best performers (obviously highly unlikely), your annual return would be 7%, just 300 bps above the S&P 500. This is meaningful outperformance, but not huge considering you picked the five best funds.
- These results show the importance of dividends. A 3% dividend yield equals three quarters of the total return of the S&P 500 over the past decade. And dividend payers tend to be less risky in terms of financial strength and stock price stability.
- Keep in mind that the tenor of the equity markets is always changing; no two decades are alike. If you ran these results for a different decade with more dynamic stock markets, there probably would be a greater dispersion of results among the 26 funds. For the years 1991-2000 tech-heavy funds would have outperformed.
- As always, “past performance is no guarantee of future results,” so we would not necessarily purchase the Fidelity funds with the strongest 10-year results.
- Fidelity’s results seem to support the case for just investing in an index fund. But we have significant reservations about index funds, to be discussed in a future post.
Fidelity Investments Large-cap Domestic Equity Funds: 10-year Annual Performance
Source: Fidelity Investments Website
(This commentary is not investment advice. See our important disclaimer.)
