Wall Street Is A Rentier Rip-Off: Index Funds Beat 99.6% Of Managers Over Ten Years

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The entire financial management industry is a profit-skimming rentier arrangement.

It may seem uncharitable to note that only .4%--that's 4/10th of 1%--of mutual fund managers outperform a plain-vanilla S&P 500 index fund over 10 years, but that is being generous: by other measures, it's an infinitesimal 1/10th of 1%.

According to the folks at the Motley Fool, only ten of the ten thousand actively managed mutual funds available managed to beat the S&P 500 consistently over the course of the past ten years.Consider the following: a quick glance at Yahoo Finance reveals the average expense ratio for growth and income style mutual funds is 1.29%. As a result, approximately $1,883 of every $10,000 invested over the course of ten years will go to the fund company in the form of expenses. Compare that to the Vanguard 500 fund, designed to mirror the S&P 500 index, which boasts an annual expense ratio of only 0.12%, resulting in ten-year compounded expense of $154 for every $10,000 invested.

Frequent contributor B.C. recently screened 24,711 funds on Yahoo Finance's fund screener and 17,785 funds on the Wall Street Journal's online screening tool. The results were sobering, to say the least: using a basic set of criteria, the first screen turned up a mere 5 managers who beat the S&P 500 index over five years. Using a slightly different set of criteria, the second screen found 71 funds out of 17,785 outperformed the index over ten years.
That's .4% of managed funds, i.e. an index fund beat 99.6% of all fund managers.
So what do we get for investing our capital in mutual funds and hedge funds? The warm and fuzzy feeling that we've contributed the liquidity needed to grease a monumental skimming operation. Ten out of 10,000 is simply signal noise; in effect, nobody beats an index fund.
The entire financial management industry is a rentier arrangement: they skim immense profits and return no productive yield at all. This is of course a key characteristic of the neofeudal debtocracy that is the U.S. economy: various cartels and state fiefdoms operate rentier arrangements that skim a percentage of the national income, protected by the state and endless PR from any market forces or transparency.

B.C.'s analysis and commentary:

Here are the most recent results for the quarter ending Q1 '13 for mutual fund managers' performance vs. the total return to the S&P 500using the Mutual Fund Screener from Yahoo Finance (data from Morningstar):

First Screen Criteria:
All funds.
Manager tenure 5 years or more.
No load.
Management fee of less than 1%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%

Number of managers who beat the S&P 500 over the past five years: 0

Second Screen Criteria:
All funds.
Manager tenure 5 years or more.
Load less than 2%.
Management fee less than 2%.

YTD: >5%
1-yr.: >10%
3-yr.: >5%
5-yr.: >0%

Number of managers who beat the S&P 500 over the past five years: 5

The screener includes a universe of 24,711 funds, which means that those who "beat the market" were in the fifth-order Pareto distribution of 2-3 out of 10,000.

Using similar criteria for the WSJ.com Mutual Fund Screener without the option of choosing manager tenure but including Lipper relative performance to peers, load-adjusted performance, and with an A-AAA rating, only 71 funds (fewer managers because of multiple fund management by a manager) of 17,785 matched or beat the S&P 500 over 10 years.

Once again, evidence of a third- or fourth-order Pareto distribution of 2-4 out of 1,000 being "winners."

The results of the past 10-12 years during the ongoing secular bear market clearly demonstrate that the "money management" industry exists primarily, if not now exclusively, for the benefit of those who "manage" other people's money, not the investors/shareholders of the funds.

By definition "hedge" funds are no better, i.e., they hedge investors' returns to no better than cash:

Hedge Funds: Going nowhere fast (The Economist)

"The past year has been another mediocre one for hedge funds. The HFRX, a widely used measure of industry returns, is up by just 3%, compared with an 18% rise in the S&P 500 share index. Although it might be possible to shrug off one year’s underperformance, the hedgies’ problems run much deeper.

The S&P 500 has now outperformed its hedge-fund rival for ten straight years, with the exception of 2008 when both fell sharply. A simple-minded investment portfolio—60% of it in shares and the rest in sovereign bonds—has delivered returns of more than 90% over the past decade, compared with a meagre 17% after fees for hedge funds (see chart). As a group, the supposed sorcerers of the financial world have returned less than inflation."

B.C.'s commentary resumes:

That there are so many "managers" in the game with AUMM (assets under mis-management), all manner of ETFs, and now pension funds "discovering" index funds and index ETFs, all trying to match or "beat the market", is a primary reason why the overwhelming majority of " managers" will underperform and thus add no value to an investors' portfolio. 

Eventually, a growing plurality of so-called "investors" will discover that the stock market is not for wealth accumulation for the majority of "investors" but a wealth-transfer mechanism from the second 9-19% with any financial surplus to the top 0.1-1% who hold a disproportionately large share of financial wealth, and to the so-called money "managers" who benefit from fee income generated by the wealth-transfer process.

However, the resources of the financial services industry generated by fee income will continue to fund mass-media advertising/propaganda in the ongoing attempt to convince the top next 19% that they can "beat the market" if only they turn over their savings to the industry to "manage". Little do most "investors" know that they are funding the perpetuation of the industry's fraud, their own underperformance, and failing to match risk-adjusted returns of cash and fixed income after fees, taxes, and inflation over a cycle.

Now, imagine what would happen to the financial services and banking industries and financial print, broadcast, and online media were these unsanitized facts about dismal money "manager" performance to be widely reported and internalized by a significant minority or small plurality of investors or the public at large.

Thank you, B.C. In my analysis, the financial services industry is simply one of many state-enabled cartels and rentier arrangements that are immune to market forces, price discovery and the bright light of truth.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
firstdivision's picture

That's becuase Hedge Funds still believe in hedging.

slaughterer's picture

Dollar down.

Euro up.

Yen down.

Gold/silver up.

Most every actively managed fund is losing money today save for their long position in the holy ES.

bania's picture

but an index fund doesn't send me swag.

Precious's picture

I'd be applauding but these Wall Street fucks cannot put an INDEX FUND together correctly EITHER !

hedgeless_horseman's picture



Wall Street Is A Rentier Rip-Off

Same as it ever was.

Gold, bitchezzz!







Fri, 01/18/2013 - 15:01 | 3166460 hedgeless_horseman



Each month, the day before op-ex, buy the same dollar amount of gold, say $1,000. When it is cheap you end up buying more ounces, when it is expensive you buy less for the same $1,000. On average, your price per ounce is less, so your return is greater...much greater.


Everytime the paper-gold folks hammer the gold price before opex you can be thankful.


Expenses are low, as you don't need a Bloomberg terminal, phone, or even a desk.


You don't need to waste your life sitting in compliance meetings, and you can sleep at night because gold has never gone to zero.



tpgaynor's picture

i wonder what the chart would look like if you added a comparrison with ....BRK.B

hedgeless_horseman's picture



Before or after the smack down?

fx's picture

there is a problem with this 'study': you can't buy the S&P500! You can by some ETF on it or some index tracker or a future, but whatever "index-investment" you buy, it will give you with 100% certainty a return of less than what the SP500 'returns'. Second, there are anumber of  -mostly value investors - out there that outperformed the S&P500by a wide margin - and they didn't use hedges or short positions to achieve that. You could call that 'noise' statistically. But it may not be noise in real world, with (your own real money... ;-)

that being said, 90% of the financial industry are indeed a waste of resources and a giant burden on society.

James_Cole's picture

The S&P 500 has now outperformed its hedge-fund rival for ten straight years

Math wins again.

Harlequin001's picture

Its a good job it's not a manipulated market whare managers make decisions based on some 'fundamental' which doesn't exist when Bennie starts printing eh...

The statistic is irrelevant.

espirit's picture

Meh, matrix metrics.

Martdin's picture

Psssshht, I could be a fund manager... here, hold my beer!

Cacete de Ouro's picture

It's not all its cracked up to be, except for the large salaries....anybody can be a fund manager...like anyone can cook....some are better cooks than others though...


Fund managering is a case of 'look busy' here come the clients - seriously -.... there is still room for beer..

css1971's picture

So what you're saying is... All I need to do is set up a fund, track an index but say it's "actively managed" and I'll be in the money?

francis_sawyer's picture

Set up a fund, fade Goldman calls, take profits after POMO days, dumpster dive during earnings season, & BTFD... How hard can it be?... Only drawback is that no matter how much perfume you splash onto it, you never lose that funky gefilte fish smell...

JustObserving's picture

Wall Street is welfare for the wealthy and the well-heeled.  

Precious's picture

Bernie Madoff went to jail for consecutive life sentences only because he pissed off a particularly vengeful group of Bucks Daddies.

tpgaynor's picture

No, madoff went to jail because he stole money and pissed everybody off.

James_Cole's picture

No, madoff went to jail because he stole money and pissed everybody off.

The latter part is true. The first part debatable, his money stealing had been known for years before it became an issue and only became an issue after he stopped being able to make payments. 

Pseudo Anonym's picture

no, madoff went to jail because he stole money not only from goyim but from jews as well.  for jews, stealing from goyim is virtuous, to steal from another jew is a carnal sin

Kirk2NCC1701's picture

Cardinal sin, not carnal sin. Look them up.

One can land you in jail or a grave, the other in the hospital. And then maybe a grave.

HelluvaEngineer's picture

Stock picking makes no sense in a world where the central bankers are simply buying the index.

ipahophead's picture

That is exactly what I was thinking.

azzhatter's picture

I have a small investment with a fund manager, really small around 10K. It has returned 13% over the past 2.5 years. The rest of my portfolio is around 28% over the same period of time. These guys are a waste of oxygen

Skateboarder's picture

Anything not returning > 12%/yr is worthless. I mean, you might as well go buy bonds lolololol.

Mike Cowan's picture

Even fund managers have the right to squirm.

Diogenes's picture

A chimp can beat the typical fund manager. This has been proven over and over again.


So, if you want the best fund manager, hire a dart throwing monkey.

Kirk2NCC1701's picture

It's cheaper and faster if you use the random number generator in Excel to pick stock.

If you don't know how to do that... you deserve a stock broker. /s

A Lunatic's picture

You didn't profit that...........

IridiumRebel's picture

But Jim Cramer said BOOYAH! Bah bah bah BOOYAH!?!?

Seasmoke's picture

Is it theft , if you willingly hand over the money to be skimmed.

Everybodys All American's picture

Bernanke has destroyed the market. It's now more or less russian roulette.

Inthemix96's picture

Fuck me folks,

I am fucking shocked.  Badly shocked that these parasites are indeed parasites.  These lot of thieving cunts are the same as section 8 housing applicants.  Whats the fucking difference from welfare for the poor and welfare for the stinking rich?

Fuck all in my opinion, let these fuckers burn.  Cunts.

Seasmoke's picture

Of course. They are all in Apple.

Mojeaux18's picture

Is that really fair?

If I invest 90% in the SPY and 10% in cash I will underperform the S&P by 10% and a smidgen(expense of the etf).  The only way to really outdo that (besides not investing in all 500 stocks on the S&P ofc) would be to leverage.  Then watch as a a simple correction kills you.

Diogenes's picture

Warren Buffet has beaten the SPY every year since 1954 by buying the kind of stocks the typical fund manager wouldn't touch with a ten foot pole. He also keeps a few billion in cash, to take advantage of bargains when the market crashes.

Mojeaux18's picture

My point is not how good or bad the typical fund manager is (I know they're crap), but that the benchmark is unfair.  If you invest 100% SPY you'll still lose (expense on the ETF).  And if you keep any stable assests like cash or bonds you might underperfom...until the market crashes ofc.

Blues Traveler's picture

Warren Buffet was one of the largest recipients of the bailouts...still is. He is crooked like a politician.

SillySalesmanQuestion's picture

Just keep churning those fees...nobody gets paid to be right or make money for their clients.

                                             Churn on!

Karlus's picture

For some reason I thought hedge funds were supposed to have opposite cooralation to the indexes. It is your "hedge" against your main investments in blue chips, S&P...etc. That if the market went south big time you were covered.


I realize the "hedge" in fund is no more. I see most of these funds as merely marketing efforts. I would guess that more than a few have specific strategies they pursue as actual hedges and might be working as planned. Is it really an apples to apples comparison?

Diogenes's picture

The first hedge funds were so called because they were simultaneously long and short the market. In other words they hedged.

They hired an optimist to buy good stocks and a pessimist to short the bad ones, figuring the market had to go up or go down so they would wind up making money either way.

It turned out most years the market doesn't do anything radical, it goes up and down, and both the optimist and the pessimist make a little  money.

They had a better return than the typical mutual fund. But because they didn't stick to plain vanilla stock and bond buying they were considered too risky for the ordinary investor, they were for a more sophisticaled investor. So hedge funds became a class of their own.

As often happens, popularity resulted in a flood of new funds. There weren't enough super genius stock pickers to go around so their results reverted to the mean (average).

orangegeek's picture

Managers are focused on asset gathering (working you into giving them your money) and management fees (how to pay themselves with your money).


ROI?  What's that?

resurger's picture

fuck them and their funds.

Smegley Wanxalot's picture

But the lady on the radio said "successful retirees had professionals to handle their money" and who am I but a mere mortal to question a nameless faceless voice on the radio who provides such useful advice.

Herd Redirection Committee's picture

What you need to understand is that our entire society has been set up like this.  A person need NEVER form their own opinion, there is always an expert on tap that will tell you what to make of the news, and what action, if any, needs to be taken.  Its the 'expert' based society..  Always trust the experts.

They are setting up society to fall for ONE HELL of a logical fallacy, the 'appeal to authority'. 

The game doesn't fundamentally change until people realize THE GOVERNMENT IS NOT LOOKING OUT FOR YOU.  You have been lied to about the pension you will receive, social security, medical care, everything.  I feel bad for the guys in the military, they have had more false promises made to them than most.  When they come back home, damn, are they going to be surprised.  They probably won't even recognize the place.  Ammo shortages, gold and silver supply issues...

Kirk2NCC1701's picture

They market the Sizzle, and you don't get the Steak.

The original pitch on Funds was that they promised better returns than CDs, but you needed a Financial Adviser to help you pick the right one(s).

That was the theory. We all know the reality. Or, some of us do.