Mutual Funds Underperforming Their Benchmark By The Most On Records

Mutual funds are investment vehicles designed to channel money of the pocket or retail investors into the pockets of funds managers. Those managers do not bring any value to their clients and suck out 2% of the total assets per year as their fees for high-life, fancy cars, suits and watches. Of course, this will come to an end during the Greater Depression, but the road will be long and painful.

Oh, and of course, nobody saw this decline and the crash ahead coming. Right?

Just see for yourself this Bloomberg report.

(Bloomberg) — Stock mutual funds are having their worst year since 1998 relative to their benchmarks, as higher volatility makes it harder to pick stocks, according to JPMorgan. 

Among 2,806 funds tracked by the brokerage, 47 percent underperformed their benchmarks by more than 2.5 percentage points this year, the most since the 55 percent recorded in 1998. Only 13 percent of the funds beat the market by the same margin. 

Nothing new here. The vast majority of managers under-perform their benchmark by more than 2.5% while they are most likely comparing their own fund which are dividend reinvested against benchmarks which are not. Add as little as 1 or 2% dividend yield and their underformance almost doubles.

But what the report doesn't say, is the actual number of funds who under perform their benchmark. Here, the number is those under-performing by more than 2.5%. The actual figure must be a lot bigger...

The underperformance accelerated last month, with the proportion of trailing funds almost doubling from July, according to JPMorgan data. [...]

The volatility helped drive August options volume to a record 550.1 million contracts on demand for a hedge against equity losses, according to the Chicago-based Options Industry Council. “The turbulence of markets in August caused a rapid deterioration of active manager performance,” Thomas J. Lee, JPMorgan’s chief U.S. equity strategist, wrote in the report dated yesterday.

Another interesting point. Passive funds cannot change their portfolio allocations and just move with the flow. While active funds need to make decisions about the direction of the markets, and these clever managers charge you extra-money for their valuable knowledge and skills, right? Well, that would seem easy, right?  You would expect that market turbulence would help active funds to perform better than passive ones, right? The only problem here, is that you would expect the fund managers to be competent and skillful. They are NOT. It doesn't need to be personal opinion of mine. The stats above are the hard proof of their incompetence.

[...] The trailing funds are likely to increase holdings in companies that move the most relative to the benchmark, known as high-beta stocks, to boost performance, Lee said. That preference may result in a year-end rally, he said. [...] “When active managers trail, there is a tendency for markets to rise into” the end of the year, Lee wrote. “Intuitively, when there are more trailing, there will be logically an attempt to outperform, which should be driven by risk-taking.”

How amazing that last statement is: any kind of news is positive for the markets. Even under performing managers, taking too much risk to play catch up with the market is seen as a bullish sign.