Do Mutual Funds Outperform Benchmarks?

Every year Dimensional analyzes returns of US-based mutual funds to determine how many funds outperform benchmarks after costs. This year's study encompasses thousands of mutual funds invested in US equities, international equities and fixed income. Let's first look at how equity funds in this sample performed against their respective benchmarks. Over the past 10 years, not all funds survived, and only a small percentage of funds survived and outperformed after costs. And for 15- and 20-year periods surviving and outperforming funds were also in the minority. We also saw similar results for fixed income funds, where a small percentage of funds survived and outperformed benchmarks. So, you might look at these results and say I'll just pick the funds that outperformed. But, do top rank funds repeat? Let's turn back the clock five years and say we wanted to invest in mutual funds using past performance as our guide. To pick a fund, we looked at returns over the previous five-year period and considered only funds that were in the top 25% or top quartile of returns. Then, we took those top performers and observed how they performed over the next five years, how many of these funds kept their top ranking? We found that only a small percentage of funds in the top quartile stayed on top. We performed this analysis for overlapping five-year periods going back to 2004, and found that, on average, the majority of the top-ranked equity funds did not repeat their top ranking, and the number that did repeat was about the same as you'd expect by chance alone. We also saw similar results for fixed income funds, where only a small percentage of the funds repeated their top performance ranking. The research suggests that a fund's past performance is not enough to predict future results. At Dimensional we believe investment strategies can be designed and managed in a way that can outperform the market without having to outguess it.