Ira Weiss, an accounting professor at Columbia Business School, looked at fund performance over the 36 years through December 1997. This 10.2 percent average included the performance of both existing and defunct funds and was dollar-weighted, so that the result reflected which funds were most popular with investors. All of these investors, no doubt, thought they were picking superior funds, yet they wound up trailing the market by 1.4 percentage points a year. But my e-mail correspondents saw it differently. They argued that averages were immaterial, because they could pick winning funds.
Evidence is scant.
Ditto for the Forbes magazine honor roll, another seemingly intelligent system for picking funds. Meanwhile, studies suggest that past stock-fund performance has little predictive value. In a paper published in the March 1997 Journal of Finance, Mark Carhart found that funds that did well one year tended to do well the next. But Mr. Carhart, now co-head of quantitative strategies at Goldman Sachs Asset Management, attributes that to the momentum of the stocks owned by the funds, rather than to manager skill. In fact, to conclude with some conviction that a manager is skillful, you may need a 25-year track record, suggested Richard Brealey in the Summer 1990 Journal of Portfolio Management.