DFA’s Davis: Why Most Mutual Funds Lag

By Douglas A. McIntyre Updated Apr 27, 8:10PM EDT · Published Mar 6, 1:05PM EST

From Investment Intelligencer

Dartboard In this summary paper, Dimensional Fund Advisors’s James Davis reviews the academic research on equity mutual-fund performance from 1969 to 2001. With some minor exceptions, the research shows the following:

The vast majority of actively managed funds lag passive benchmarks.
Some fund managers do have above-average stock-picking skill, but usually not enough to allow them to overcome the costs of their own trading and compensation.
Almost all fund performance can be explained by four "factors": the market’s performance, the relative size of the stocks in the portfolio, the relative valuation of stocks in the portfolio, the relative "momentum" of stocks in the portfolio. These factors have little to do with traditional "stock-picking."
The market is not perfectly efficient, but its inefficiencies are not large or regular enough to exploit consistently.

In short, the vast majority of mutual funds lag the market. They do this not because their managers are stupid but because beating the market is hard. Fund buyers who want to give themselves the best chance of success should therefore choose among low-cost passive funds.

Posted by Henry Blodget on March 06, 2007

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Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

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A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.