BGR, Yes, if you are a professional selling your services, you have to use a yardstick. It does not have to be a market. How about Gabelli's yardstick for his Gabelli Equity Trust, 10% plus inflation as measured by the CPI? Makes sense to me. Or, the one I used in the income fund, T-Bond yield plus 2% on a total return basis. Again, a good benchmark that is not based upon a market. On my current Maximum Income Partnership, I earn 20% of the profits on the total return that is 5% above the T-Bond yield. I have yet to miss a bonus, but I still think that is a tough bogey and I don't know any other income manager who would try it. Again, this bears no comparison to a market return.
There are several problems I have with the concept that equity mutual funds have not beaten the market. The most important is the one you seem to keep missing, and you are not alone. Mutual funds are huge and they ARE the market in most senses of the word. The average of the average, less fees, can never beat the average over a long period of time. Never expect them to do it because it cannot happen and it is a function of their dominance in the financial market. It is like expecting his shadow to knock out the shadow boxing puncher.
Less importantly, most folks mean the S&P 500 when they make that comparison. First, many equity funds are index funds and they cannot beat the index by definition. In other words, some of the players are guaranteed not to beat it, so it shouldn't be a shock that they do not. Also, many funds shadow indices other than the S&P 500. Do we really expect Fidelity Korea to outperform the S&P 500? I hope not, because that is a non-starter.
More to follow.
MB |
