Mutual Fund Performance

History has shown that 87.3 percent of the mutual funds with a 10-year track record underperformed the S&P 500 Index. Why do mutual funds under perform? The Securities and Exchange Commission (SEC), the government agency that regulates U.S. mutual funds and stock markets, prevents funds from placing more than 5 percent of their assets (money) in a given stock. Therefore, the funds' portfolios must contain at least 20 stocks each. Actually, most funds contain at least 50 to 100 stocks. This protective regulation prevents the creation of small-focused portfolios that beat the benchmark S&P 500 index.

Another inherent performance impediment mutual funds must contend with involves investing huge sums of money (0.5 to more than a $100 billion). I wish I had that problem. A fund manager will buy blocks of shares that are equivalent to millions of dollars. Why is this a problem? This means the manager must invest in companies that have hundreds of millions or billions of shares outstanding. Most small-growth companies have millions of shares outstanding. Logistically, funds have a tough time investing in small promising companies that have bright futures. Microsoft, Dell, and countless others all started out as Initial Public Offerings (IPO) with a limited number of shares outstanding. Popular mutual funds that receive a lot of money must invest in relatively large companies that do not grow as quickly as smaller companies. There are funds that invest in small growing companies, however, they are rarely included in company sponsored retirement plans (401Ks and pension plans). One must search for the funds that invest in small-cap companies and approach them directly. 

Most mutual funds do not beat the S&P 500, however, there are funds that have performed extremely well over the last 18 to 40 years. The challenge is locating these critters.