Are The Returns Of Jeremy Siegel’s “Superstar” Funds Likely To Persist?
August 30, 2016
by Larry Swedroe
It's no secret that ESG (environmental, social, governance) factors have become more important in investing. Fund managers are increasingly incorporating ESG factors into their portfolio allocations. However, those that don't are in danger of being left behind as investors increasingly avoid allocating with funds that don't incorporate ESG into their allocations. Q3 2021 hedge fund Read More
If historical returns provide useful insights when it comes to identifying skillful active managers, then surely those funds with the longest track records of success are most likely to be the “winners” of the future. I tested this hypothesis using data from Jeremy Siegel’s Stocks for the Long Run, an investment classic.
The 2014 edition contains a list of the 10 best-performing domestic mutual funds over the 41-year period from 1972 through 2012. Here’s the list for that period with their returns compared to the return of the S&P 500 Index.
|Fund||Return (%) 1972-2012|
|Mutual Shares Z||13.7|
|T. Rowe Price Small Cap||12.9|
|Davis NY Venture Fund A||12.4|
|Fidelity Advisors Diversified O||12.2|
|Janus Fund D||12.1|
|S&P 500 Index||10.0|
While the returns of these funds were clearly impressive, Siegel noted that “chance may have played a role.” For example, he determined that the odds that a fund would outperform the S&P 500 by 4% or more were one-in-12. The full sample Siegel examined was 86 funds. Thus, randomly, seven should have been expected to outperform at that level, yet only one did.
On the other hand, Siegel determined that Fidelity Magellan’s performance from 1977 through 1990, under the direction of Peter Lynch, wasn’t due to luck. The fund outperformed the S&P 500 by an incredible 13% per year. The probability of that occurring was one in 500,000.
That leaves us with a question: What, if anything, do the returns of these 10 best-performing funds over a very long period tell us about future performance? Is the past predictive of future results? The fact that these 10 funds had assets under management of $200 billion at the end of 2015 seems to tell us that investors certainly believed that persistence in performance exists.