Mutual Fund Madness

Ezra Klein points to the latest year-end report on mutual funds from Standard & Poors.  The highlight is pretty much the same as it is every year:

Over the five year market cycle from 2004 to 2008, S&P 500 outperformed 71.9% of actively managed large cap funds, S&P MidCap 400 outperformed 79.1% of mid cap funds and S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003.

The belief that bear markets favor active management is a myth. A majority of active funds in eight of the nine domestic equity style boxes were outperformed by indices in the negative markets of 2008. The bear market of 2000 to 2002 showed similar outcomes.

And don't forget fees!  Not only do actively managed funds do worse than index funds, they charge you for the privilege of doing worse than index funds.

Hedge funds are no better, by the way.  Research is hazier here because hedge funds are more secretive, but as near as I can tell from the published data, their average return is no better than the broad market either.  The main difference is that instead of simply charging fees for helping you do worse than an index fund, they charge you gargantuan fees for helping you do worse than an index fund.

Isn't Wall Street grand?