I found a Growth Mutual Fund that has beat its peers for 90% of the last 20 years- Wh

[Sojourner]

Just as there are superstars in sports there are superstar investors. Not very many people can dunk a basketball but some can. Not very many people can hit 40 HRs a year, but some can. Same thing with professional investors.

While it's true that very few people (even professional baseball players!) can hit 40 HRs a year, it's also true that essentially none of them can hit 40 HRs a year, consistently, year after year. Same is true with professional investors. I am not aware of any who have consistently outperformed (say, by being in the top quartile vs. their peers 80% of the time) over a period of 20+ years.

I'm pretty sure this is because, regardless of how good one's instincts, intuitions, knowledge, and aptitude may be when it comes to investing, there is simply no way to consistently predict the behavior of a system as massively complex as the stock market. It's fundamentally a "chaotic" system (as in the physics term "chaos") and thus cannot be accurately modeled, even by a very capable, very intelligent, very intuitive human brain.

 

[easysurfer]

While it's true that very few people (even professional baseball players!) can hit 40 HRs a year, it's also true that essentially none of them can hit 40 HRs a year, consistently, year after year. Same is true with professional investors. I am not aware of any who have consistently outperformed (say, by being in the top quartile vs. their peers 80% of the time) over a period of 20+ years.

I'm pretty sure this is because, regardless of how good one's instincts, intuitions, knowledge, and aptitude may be when it comes to investing, there is simply no way to consistently predict the behavior of a system as massively complex as the stock market. It's fundamentally a "chaotic" system (as in the physics term "chaos") and thus cannot be accurately modeled, even by a very capable, very intelligent, very intuitive human brain.

To add to the analogy, professional baseball players don't blossom til later in their careers. So, even harder to spot. Also, there is the possibility of injury to shorten a career.

As for a fund manager, what happens if the manager decides to call it quits? Then what? Much easier IMO to just go for an index and pop some popcorn .

 

[OldShooter]

... I believe some of this success is dumb luck or risk-taking but much of the success is just due to a superstar manager and his/her team that just know how to pick winning stocks and know when to buy and sell. Do you agree and why? ...

@Digital Nomad, one of the nice things about living in the US is that we are free to believe whatever we want. Belief in a flat earth has had long-term popularity; ivermectin is a more recent fad. Personally, I believe that I'll never develop a taste for Brussels sprouts.

In the context of investing my training as a scientist and engineer informs my conclusions and actions.

First, I will say that your belief in superior managers is entirely understandable. The investment industry pushes this myth because its falsification is an existential threat to all those Porsches in all those mini-mansion garages. They need your unquestioning loyalty to the myth and they spend a lot of money to maintain it.

Second, I will say that my research over many years says that you are completely wrong. I suggest that you abandon this thread now and go to spend a few months educating yourself. Here are some suggestions, in no particular order:

"A Random Walk Down Wall Street" by Burton Malkiel https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338 This is the grandaddy of them all.

"Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Losers-Game-Strategies-Successful-dp-1264258461/dp/1264258461 (latest edition, May 2021) Ellis does an excellent job of explaining his theory on why the market is random.

"Fooled by Randomness" by Nassim Taleb: https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219 The title tells all.

"Unconventional Success" by David Swensen https://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383 A little older title but still well worth studying.

Fifty years ago (1967), Michael Jensen reported on his study of 115 mutual funds, thus: : https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance." (Later in his career, Jensen was awarded a Nobel prize for other investing insights.)

Fama/French "Luck Versus Skill in the Cross Section of Mutual Fund Returns" :https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 (This is the paper that French refers to in the video I linked.)

Here is an interesting one, something we tend to forget: Stock-picking is a Keynesian beauty contest, not really a business forecasting exercise. https://en.wikipedia.org/wiki/Keynesian_beauty_contest)

Finally:
S&P SPIVA gateway: https://www.spglobal.com/spdji/en/spiva/#/
S&P Manager Persistence gateway: https://www.spglobal.com/spdji/en/indexology/core/persistence-scorecard/ Here is decades of data; I suggest that you study particularly the Manager Persistence reports.

If those are not enough, let me know. I have more.

 

[Qs Laptop]

While it's true that very few people (even professional baseball players!) can hit 40 HRs a year, it's also true that essentially none of them can hit 40 HRs a year, consistently, year after year. Same is true with professional investors. I am not aware of any who have consistently outperformed (say, by being in the top quartile vs. their peers 80% of the time) over a period of 20+ years.

The objective is to beat the index, not necessarily be in the top quartile. Over 20 years a professional mutual fund manager can have several bad years yet still handily beat the index. Same thing the pro baseball player. He can hit 40 HR for 6 out of 10 years, hit 30 HRs for 3 of those 10 years, and maybe hit 25 the other year. Still, easily beats the number of HRs corresponding to the leaguewide average.

 

[Qs Laptop]

To add to the analogy, professional baseball players don't blossom til later in their careers. So, even harder to spot.

Not even remotely true. See Mike Trout, Vlad Guerrero, Ronald Acuna Jr., Fernando Tatis, Juan Soto, Wander Franco, Aaron Judge, etc. etc.

Also, there is the possibility of injury to shorten a career.

And how often does an injury sideline a mutual fund manager?

As for a fund manager, what happens if the manager decides to call it quits? Then what? Much easier IMO to just go for an index and pop some popcorn .

I presume the new manager would continue to carry out the objectives and methods of the previous manager. An individual investor is always free to go elsewhere.

 

[RunningBum]

3. They have a track record of beating the indexes over 3, 5, 10, 15, or 20 years. (This fact alone should rule out luck as being how they do it.)

The OP's pick, CPODX, returned 116.57% in 2020. That skews the 3, 5, 10, 15, and 20 returns. Figure out what those returns would have been at the start of 2020. I don't know the answer, and I'm not motivated to figure it out, but I doubt it suggests such a spectacular 2020.

But using your metric, CPODX now has that long track record over the indexes. We should expect more of the same in 2021, right? Yet it's behind its benchmarks. See my post #46.

You can only find these super-performing managers in the rear view mirror. By chance some will over-perform in the next year or two, but not consistently.

So, no, that fact you refer to does not rule out luck.

 

[Qs Laptop]

@Digital Nomad, one of the nice things about living in the US is that we are free to believe whatever we want. Belief in a flat earth has had long-term popularity; ivermectin is a more recent fad. Personally, I believe that I'll never develop a taste for Brussels sprouts.

That's so classy of you to compare Digital Nomad's belief in professional money managers being real to a belief in a flat earth.

Second, I will say that my research over many years says that you are completely wrong. I suggest that you abandon this thread now and go to spend a few months educating yourself.

Yep, real classy.

Fifty years ago (1967), Michael Jensen reported...

Fifty years ago!! Good thing there are the same stocks and same number of them around now that were around in the 1960's when Jensen's study was done. Good thing market dynamics have not changed, nor has consumer tastes and spending habits.

 

[easysurfer]

Not even remotely true. See Mike Trout, Vlad Guerrero, Ronald Acuna Jr., Fernando Tatis, Juan Soto, Wander Franco, Aaron Judge, etc. etc.



And how often does an injury sideline a mutual fund manager?



I presume the new manager would continue to carry out the objectives and methods of the previous manager. An individual investor is always free to go elsewhere.

That's some of the ball players who are stars from the beginning. But there are many those who've been projected as future stars but careers ended up not panning out due to under performance or injury or other reasons. Mark Prior, Fred Lynn, Darryl Strawberry to name a few.

 

[braumeister]

As hard as it may be, we should always try to remember that this is a community.

 

[OldShooter]

My opinion is that many of the skills that come to mind, like sports, music, etc. are not a good beginning to understanding the market. The reason is that skills matter to one degree or another in these activities.

Once one accepts the idea that the market is best approximated by a random process, it becomes obvious that any success has to be due to luck. For an analog that is closer to the market, consider a trout stream and whether it is feasible to predict future eddies, ripples, and whorls. Of course it is not, and the approximation is a random process despite the fact that the mathematics of incompressible fluids is well understood.

 

[Qs Laptop]

The OP's pick, CPODX, returned 116.57% in 2020. That skews the 3, 5, 10, 15, and 20 returns. Figure out what those returns would have been at the start of 2020. I don't know the answer, and I'm not motivated to figure it out, but I doubt it suggests such a spectacular 2020.

Yet, it did happen. It did return 116%. S&P500? 18.4%

But using your metric, CPODX now has that long track record over the indexes. We should expect more of the same in 2021, right? Yet it's behind its benchmarks.

It might not beat the index in 2021. But it beat it by 6X last year. It might have a down year compared to the index in 2021, but the long term returns are a lot better.

You can only find these super-performing managers in the rear view mirror. By chance some will over-perform in the next year or two, but not consistently.

The topic of the thread was a mutual fund that beat the market consistently over the past 20 years. Not if it's going to beat it in the next year or two.

Take any 5, 10, 15, or 20 year span you like. You pick the endpoints. Compare FBGRX to the index. Or try FOCPX. TRBCX. I'm sure there are more. See how they did against the index.

 

[GravitySucks]

@Digital Nomad, one of the nice things about living in the US is that we are free to believe whatever we want. Belief in a flat earth has had long-term popularity; ivermectin is a more recent fad. Personally, I believe that I'll never develop a taste for Brussels sprouts.

In the context of investing my training as a scientist and engineer informs my conclusions and actions.

First, I will say that your belief in superior managers is entirely understandable. The investment industry pushes this myth because its falsification is an existential threat to all those Porsches in all those mini-mansion garages. They need your unquestioning loyalty to the myth and they spend a lot of money to maintain it.

Second, I will say that my research over many years says that you are completely wrong. I suggest that you abandon this thread now and go to spend a few months educating yourself. Here are some suggestions, in no particular order:

"A Random Walk Down Wall Street" by Burton Malkiel https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393330338 This is the grandaddy of them all.

"Winning the Loser's Game" by Charles Ellis https://www.amazon.com/Winning-Losers-Game-Strategies-Successful-dp-1264258461/dp/1264258461 (latest edition, May 2021) Ellis does an excellent job of explaining his theory on why the market is random.

"Fooled by Randomness" by Nassim Taleb: https://www.amazon.com/Fooled-Randomness-Hidden-Markets-Incerto/dp/0812975219 The title tells all.

"Unconventional Success" by David Swensen https://www.amazon.com/Unconventional-Success-Fundamental-Approach-Investment/dp/0743228383 A little older title but still well worth studying.

Fifty years ago (1967), Michael Jensen reported on his study of 115 mutual funds, thus: : https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153 "The evidence on mutual fund performance (aka professional speculators) indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-the-market-and-hold policy, but also that there is very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance." (Later in his career, Jensen was awarded a Nobel prize for other investing insights.)

Fama/French "Luck Versus Skill in the Cross Section of Mutual Fund Returns" :https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356021 (This is the paper that French refers to in the video I linked.)

Here is an interesting one, something we tend to forget: Stock-picking is a Keynesian beauty contest, not really a business forecasting exercise. https://en.wikipedia.org/wiki/Keynesian_beauty_contest)

Finally:
S&P SPIVA gateway: https://www.spglobal.com/spdji/en/spiva/#/
S&P Manager Persistence gateway: https://www.spglobal.com/spdji/en/indexology/core/persistence-scorecard/ Here is decades of data; I suggest that you study particularly the Manager Persistence reports.

If those are not enough, let me know. I have more.

Agree with you on everything here except the Brussel Sprouts.

https://www.bhg.com/news/brussels-sprouts-less-bitter/

The new strains are less bitter and no longer smell like butt.

 

[Qs Laptop]

That's some of the ball players who are stars from the beginning. But there are many those who've been projected as future stars but careers ended up not panning out due to under performance or injury or other reasons. Mark Prior, Fred Lynn, Darryl Strawberry to name a few.

Well that's interesting. Because in your prior post you said that players don't blossom until later in their career. Now you are moving the goalposts and giving examples of players projected as future stars that didn't pan out.

No one is suggesting there were mutual fund startups that were projected as being future stars that didn't pan out.

 

[Qs Laptop]

Once one accepts the idea that the market is best approximated by a random process, it becomes obvious that any success has to be due to luck.

Yes, getting the initial premise of an argument incorrect, leads to incorrect conclusions.

I've noticed if I put on sunglasses with a yellow tint to the lenses, guess what? Everything I look at is yellow!

 

[RunningBum]

The topic of the thread was a mutual fund that beat the market consistently over the past 20 years. Not if it's going to beat it in the next year or two.

No, no it's not. The OP wrote this to end post #1:

So if a Mutual Fund did better than its peers year after year after year, would you assume that there is a better than 50/50 chance it will continue to beat most of its peers in 2022?

 

[Montecfo]

Vanguard PRIMECAP was a fund that did extremely well. I've been invested in it for a number of years, though I did cut my holdings considerably a couple years ago.

https://www.fool.com/investing/2016/09/29/vanguard-primecap-fund-an-active-fund-even-indexer.aspx shows how it did from 2001 to 2015. It seemed to me to be beating the S&P 500 all the time, but the reality is it only did 9 out of 15.

Still, that's pretty good. About 3 years ago I wanted to make my taxable account more efficient, and I considered whether to sell of PRIMECAP. I must be crazy to sell off a fund that does so well every year, right? And it's closed to new investors, so it's gotta be great.

But logic ruled, so I sold it off and bought an index fund. Lo and behold, PRIMECAP is trailing the S&P for the preceding 1 and 3 years. https://investor.vanguard.com/mutual-funds/profile/performance/vpmax

Of course a fund could outperform the index every year. Like I could correctly call "tails" in 20 straight coin flips. But I can almost guarantee I won't.

Do you think the underperformance for one or three years proves you were right to sell it?

 

[easysurfer]

Well that's interesting. Because in your prior post you said that players don't blossom until later in their career. Now you are moving the goalposts and giving examples of players projected as future stars that didn't pan out.

No one is suggesting there were mutual fund startups that were projected as being future stars that didn't pan out.

One more baseball player name then I'll stop since this isn't a baseball thread.

Christian Yelich is one example of a late bloomer. Who knew early on that he'd become such a superstar.

My point is, it's easier pick superstars (in any field) after they become household names than before. That's why I'm happy to just go for something more certain. Like following them indexes.

 

[RunningBum]

Do you think the underperformance for one or three years proves you were right to sell it?

I'm not sure that "proves" is the right word.

I bought most of my PRIMECAP holdings when I believed that surely a good fund manager could start with whatever indexed matched it's objectives, and then underweight or remove what they thought was the bottom 5 or 10%, and overweight what they thought was the top 5-10%, and surely it would outperform. And perhaps they might be better at seeing a downturn coming and going with more fixed income holdings.

As years went by I became more convinced that indexing was the right approach. But I couldn't let go of this winner.

Finally, with ACA subsidies, I had reason to sell it. The fund would have to not only beat the index, but also cover the loss of subsidy I was headed for because it had higher and unpredictable distributions.

So the act of selling the fund and investing the proceeds in an S&P 500 index met my objective. The fact that the new fund beat PRIMECAP was a bonus, really. Even if PRIMECAP had done better I was satisfied with my rationale for selling it, and would not have second-guessed that decision.

This whole sequence does reinforce my current thinking that it's really hard for a fund to consistently beat the index. One instance is not proof, but it is a good example.

 

[Time2]

Ha. Apparently I didn't read it too well the first time. Got it now.

I'm in that crowd also, I missed the reference the OP made to 2000 and 2008. And I brought it up in my post.

 

[Qs Laptop]

No, no it's not. The OP wrote this to end post #1:

Ahh, yes, I see that now. I was responding to this posted by the OP:

So, my example Growth Mutual Fund did not have a perfect record. But my question still stands and as yet has not been answered fully. So I will ask the question again:

Most Mutual Funds don't beat the S&P 500 over a long period of time but if you do your research there are a handful of funds that over a long period of time beat a total stock market funds and its peers. I believe some of this success is dumb luck or risk-taking but much of the success is just due to a superstar manager and his/her team that just know how to pick winning stocks and know when to buy and sell. Do you agree and why?

 

[Qs Laptop]

The OP's pick, CPODX, returned 116.57% in 2020. That skews the 3, 5, 10, 15, and 20 returns. Figure out what those returns would have been at the start of 2020. I don't know the answer, and I'm not motivated to figure it out, but I doubt it suggests such a spectacular 2020.

I have an interest in this since I bought into CPOAX, the retail version of CPODX (the institutional version) in spring of 2020. I don't remember how CPOAX got on my radar, but I researched it and found some of the top holdings were:

Moderna
Zoom Video
Shopify
Carvana
Veeva
Square, Inc.

It doesn't take a rocket surgeon to see that this fund primarily holds stocks that would flourish during a pandemic, with people and workers largely staying at home.

So, yes, a little due diligence and a person could have figured out that CPOAX would likely have a good, or great year.

 

[RetiredAt55.5]

Another problem with a fund that has a successful run, is that new investors flock to it, and it becomes harder and harder for the manager to be as successful since they have to pick more and more winners.

Aside from the manager change, this is why Fido's Magellan ran out of steam. People forget that Lynch was most successful when the fund was much smaller.

 

[Alan]

Thanks for the interesting discussion.