Get Our Blog
  • Eric Hahn

Why Your Hot Mutual Fund Probably Won’t Stay That Way

Any investor who's read the fine print of his or her mutual fund prospectus is familiar with the phrase "past performance is no guarantee of future results," or something to that effect. Of course, very few investors ever actually read the fine print, but a recent report from the ratings agency Standard & Poor's makes a strong case they ought to.

The "Persistence Scorecard" is published twice a year by S&P Dow Jones Indices. It tracks the consistency of the top performing, actively managed U.S. mutual funds. Index and sector funds are not included in the sample. And survivorship bias — the tendency of analysts to throw out the results of funds that didn't survive the period of observation — is eliminated by using a database of funds from The University of Chicago's Center for Research in Security Prices as a baseline data source.

Several findings in particular stand out from the most recent edition of the scorecard, released last month. The details should be enough to convince even the most loyal and diehard investors that it's time to give up actively managed mutual funds and make the switch to passive, market-matching index funds:

  • Less than four percent of the 687 funds studied from March 2012 through March 2014 managed to stay in the top quartile of performers. Only 18.66 percent of 1,372 funds studied for the same time period stayed in the top half.

  • Out of 715 funds studied from March 2010 through March 2014, only 0.28 percent stayed in the top quartile of performers. Only 4.47 percent out of 1,431 funds studied for the same time period stayed in the top half.

In other words, even when actively managed funds perform extremely well, they’re not likely to sustain that performance for an extended period of time. “It is worth noting,” the S&P report said, “that no large-cap or mid-cap funds managed to remain in the top quartile at the end of the five-year measurement period.”

Instead, the best-performing funds were prone to becoming the worst-performing funds, and vice versa. And maybe not so surprising, the bottom 25 percent of funds were much more likely to be merged or liquidated for any time period or market-cap category studied.

So actively managed mutual funds are not all they're made out to be, particularly by the companies trying to get you to invest your money in them. Why index funds then? As the name suggests, index funds simply track a benchmark, like the S&P 500, rather than try to beat the market; the Persistence Scorecard shows just how difficult it is for fund managers to perform consistently well over long periods of time, suggesting this is no easy task.

And with an index fund there's no fund manager actively trading stocks in and out of the fund — which costs money — so overall costs remain low. And since index funds mean to only match the market, there's never a worry of significantly underperforming it, let alone the potential weirdness of your fund flip-flopping between being a top performer and a bottom performer for no discernible reason.

The S&P 500 gained 29.6 percent in 2013. If you had money in a corresponding index fund, you did well. Of course, following the market doesn't mean you'll always do that well, but you'd have to consider yourself pretty lucky to think you — or a fund manager — could do much better.

Portfolio &
Money Management


Contact Us

4 Landmark Square - Suite 315
Stamford, CT 06901





ADV Part 2 | ADV Part 3 (CRS) Privacy Policy | Cyber Security Policy | Business Continuity Plan Client Secure Upload


Check the background of this firm on FINRA’s BrokerCheck.           


NS Capital LLC is a Registered Investment Adviser. NS Capital and its representatives are in compliance with the current filing requirements imposed upon registered investment advisers by those states in which NS Capital maintains clients. NS Capital may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. NS Capital’s web site is limited to the dissemination of general information pertaining to its advisory services, and through the NS Blog access to additional investment-related information, publications, and links.  Accordingly,  NS Capital’s web site on the Internet should not be construed by any consumer and/or prospective client as NS Capital’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet.  Any subsequent, direct communication by NS Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of NS Capital, please contact the SEC or the state securities regulators for those states in which NS Capital maintains a notice filing.  A copy of NS Capital current written disclosure statement discussing NS Capital’s business operations, services, and fees is available from NS Capital upon written request. NS Capital does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to NS Capital’s web site or incorporated herein, and takes no responsibility such content.  All such information is provided solely for convenience purposes only and all users should be guided accordingly.


Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by NS Capital), will be profitable or equal any historical performance level(s).


Certain portions of NS Capital’s web site (i.e. newsletters, articles, commentaries, etc.) may contain a discussion of, and/or provide access to, NS Capital (and those of other investment professionals) positions and/or recommendations as of a specific prior date.  Due to various factors, including changing market conditions, such discussion may no longer be reflective of current position(s) and/or recommendation(s).  Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from NS Capital, or from any other investment professional. NS Capital is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 


Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if NS Capital is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of NS Capital by any of its clients.  Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser. Each client and prospective client agrees, as a condition precedent to his/her/its access to NS Capital web site, to release and hold harmless , NS Capital’s officers, directors, owners, employees and agents from any and all adverse consequences resulting from any of his/her/its actions and/or omissions which are independent of his/her/its receipt of personalized individual advice from NS Capital.

© 2020-2025 NS Capital LLC. All Rights Reserved.