Dimensional Mutual Fund Landscape 2018

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Equius clients know that our asset class investing strategy has its roots in efficient market and “three-factor” research from the University of Chicago (Fama and French). Without the substantial, high-quality data provided by the university’s Center for Research in Securities Prices (CRSP), we might still believe that active money managers have a reasonable chance of beating the market over time.

In fact, despite the overwhelming statistical evidence introduced over several decades, traditional investment advisors, stockbrokers, and retirement plan consultants continue to suggest to the uninformed that they can find the “winners” among thousands of actively-managed mutual funds and that those winners will persist in the future. The Morningstar Mutual Fund database is their go-to propaganda tool.

Propaganda can be defined as “information, especially of a biased or misleading nature, used to promote or publicize a particular cause or point of view.” The term is most often used in a political context, but I think it applies to Morningstar very well. Morningstar is a survivorship-biased database and everyone in our industry knows it. Most investors, however, do not. What this means is that only mutual funds that have survived, say, the last 15 years, remain in the database. This skews upward the performance of groups of funds, for example “large value” funds, relative to a common indexed benchmark. In other words, it makes active management look much better than it is. Morningstar then ranks the survivors (heavily influenced by recent performance) and assigns them a “star” rating (4 or 5 are the best). This is how most funds for 401(k) plans are selected, rejected, selected, and rejected over and over again as advisors and consultants attempt to “earn” their fees. I believe this is one of the most shameful, corrupt, and costly schemes ever imposed on working people in this country.

Thankfully, the University of Chicago and a special group of academics have continued to focus on this charade, and in the process developed The CRSP Survivor-Bias-Free US Mutual Fund Database (originally funded by Eugene Fama and CRSP). Dimensional Fund Advisors reviews this research and publishes an annual “Mutual Fund Landscape” report, the 2018 version of which is enclosed. This year’s report shows that “for the 15-year period through 2017, only 14% of equity funds and 13% of fixed income funds survived and outperformed their benchmarks.” Furthermore, “most funds in the top quartile of past three-year returns did not repeat their top-quartile ranking over the following three years. Over the periods studied, top-quartile persistence of three-year performers averaged 26% for equity funds and 32% for fixed income funds.” These are not the kind of odds to which long-term investors should subject their serious assets. Would you agree?

We encourage you to review this year’s report to confirm that an index/asset class investing approach is the right one for your investment portfolio. But we’d also like to encourage you to pass the report along to someone you know who still believes in active management—particularly anyone in charge of a corporate retirement plan—and have them contact us for an investment review.

As always, please let us know if you have any questions or comments about this or any other investing topics.

Interested in reading more by Jeff Troutner? Click here. or reach out to directly through e-mail.