Every year, around 75% of all fund managers aren’t capable of beating S&P 500. How is it that a basket consisting of 500 stocks can beat most mutual funds that are actively managed? The people managing such funds are mostly brilliant people with high education and access to highly advanced Decision Support Systems and Information Systems worldwide. So, how come they aren’t capable of outperforming the S&P 500?

Here’s a management performance test that is quite crude: Let us compare the S&P 500 index for periods including one year, three years, five years and ten years against the mutual fund performance of domestic-equity by Morningstar from the end of April in 1995. The overall S&P 500 index happens to be a just comparison for domestic and big companies.

The results are as follows:

• Out of a thousand funds that Morningstar ended up covering in a year, 110 were able to beat S&P 500; the rest fell short.
• In three years, S&P 500 returned 10% and out of the 609 funds, just 266 beat S&P 500.
• In five years, out of the 470 funds, around 204 beat S&P 500.
• In ten years, just 56 out of 262 funds beat S&P 500.

It is not surprising that the majority of funds don’t beat the entire stock market. Since most of the money that is invested within the stock market stems from overall mutual funds, it isn’t possible for most of those funds to outperform the stock market.

The promise that has been implied and held over to investors within mutual funds that are actively managed would be that to exchange with higher fees, the managed fund that is actively managed should provide top-notch market performance. A host of barriers exists to fulfill this particular promise.

Several problems include the following:

• The bigger the mutual fund, the harder it gets to provide exceptional performance.
• Even though performance runs counter to fund size, fund managers are strongly motivated to let funds grow bigger since they could then make more money.
• The majority of managers with skills in mutual funds are hired by hedge funds. Here, their rewards in finances are greater and less restriction exists when it comes to investment techniques.

Since the usual restrictions and inflexibility of the majority of mutual funds, investment capital tends to be incorrectly hedged against fluctuations in the market. In the majority of cases, when the equity exposure’s beta is compared to equal equity exposure, your risk or reward ratio would have fewer rewards compared to buying the same equity exposure at S&P 500. You will do much better in beating S&P 500 if you use an effective timing system in the stock market.