Tuesday, January 17, 2012

2011: A terrible year for mutual funds

A Businessweek article by Lu Wang last week which reported on the terrible year mutual funds had in 2011 should give investors a lot to chew on when selecting funds.  The facts are stunning – only 17% of actively managed large-cap funds beat their benchmark.  What might this mean for investors going forward and what are the implications for how mutual funds are rated?

We have written about closet indexing before, and it's important to consider that 2011 may be a result of the trend noted in some academic studies that closet indexing is increasing.  The Businessweek article also points out that correlations among stocks were at a record high in 2011, making stock picking more difficult.  This is known to happen in rough times before, but what good are historical analyses if such fundamental things can change so quickly?  Would something like Active Share be a better measure to use in such times?

There are many open questions, but we do think that in times like these, analysis based on holdings could give investors a valuable, different view into funds.

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