Mutual Fund Underperformance - A Sadly Consistent Story

Standard and Poor's has just released the latest quarterly SPIVA report that tracks the performance (see the list of all reports here), or I should say, the under-performance of Canada's mutual funds.

The results are perhaps not surprising to those familiar with mutual funds but they are shocking nevertheless. Consider the chart below, constructed from SPIVA reports from 2005 to the most recent. Note the following:

1. A tiny proportion, hovering around 10%, of actively managed Canadian equity mutual funds manage to outperform the relevant index the TSX composite over a rolling three-year period (I picked three years since that is around the average holding period for mutual fund investors - if I had picked five years, the results would be even worse)
2. The amount of under-performance is enormous, about 4% per year - see the red line on the graph.
3. These poor results are consistent through all of 2005 to 2008 including times of strong upward movement and more recent big declines (though we have yet to see October's results)