My acquaintance, who works as a full-time investor, thinks that actively managed funds can occasionally beat indexes. She cites funds like Fundsmith 15 percent over ten years as an illustration.
Although their terrible years are truly bad, the stats appear good. Are funds such as this genuinely able to beat benchmarks?
Fundsmith has indeed outperformed the market, and Terry Smith is an excellent investor. However, investing in Fundsmith could result in higher fees compared to ETFs, and there is a risk that Terry Smith might retire early or face unforeseen circumstances. Similarly, investing in Peter Lynch’s fund in the past would have also yielded significant returns.
Although your friend is correct, it doesn’t imply I will move to actively managed funds for my retirement.
Some of these funds will outperform their benchmarks over a period of time ranging up to many years. Generally 25% or less for three years, even less for five.
Still, nobody can predict which funds will do better. Analyzing prior performance is ineffective. The proportion of funds that perform better in one period and better still in the next is roughly what one would anticipate based only on random chance.
Please refer to the S&P Index vs. Active report and the S&P Persistence report, which are both released twice a year and typically provide results that are quite similar, for more information.