Top performing stock funds usually don't stay that way

One of the more useful reminders about how difficult it is for active mutual fund managers to consistently outperform comes from the researchers from S&P Dow Jones Indexes. Twice a year, they look how the better performing funds are doing two and four years later, to see if they're still top dogs.

This week's report confirms most of their previous findings since at least 2009: It's hard to stay on top. In fact, the odds may be against current top funds staying on top. For example, the researchers note that if results were completely left to chance, one of every four funds that had a good year in 2010 (that is, did better than at least 50 percent of their peers) would also have good years in 2011 and 2012.

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In fact, in the latest report only about one in six large-cap funds were able to keep up their performance in the following two years, and only one in seven mid-cap funds. Small-cap funds were most likely to maintain their outperformance, but even then only 23 percent of small-caps were able to chain together 3 consecutive outperforming years. A similar lack of persistence - to use the study's language - was observed over five years as well.

So the evidence continues to pile up that actively managed funds aren't likely to consistently outperform the market. And although the explanations of the underperformance of active funds change over time - currently, the primary culprit is stocks moving in lockstep, making it difficult to tease out the winners - the underperformance has persisted for years before the S&P studies began.

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