Perhaps you've heard that roughly three-quarters of all
mutual funds lose to the market over the long run. The
question is
why-- why do presumably smart and talented managers
serve you worse than simply buying an index fund? Believe me,
I've met plenty of fund managers, and the vast majority of
these folks
aretalented and responsible and hardworking. They're
not bad stock pickers.
The best explanation I've found comes from a recent study
by professors Cohen, Polk, and Silli. Their study, "Best
Ideas," provides pretty convincing evidence that the rules
are stacked against smart fund managers. Their few very best
ideas
doperform well -- beating the market and their other
picks by approximately 1% to 4% per quarter (which is
significant). However, the very nature of a mutual fund
requires managers to pick dozens -- perhaps hundreds -- of
stocks.
Who can pick 100 good stocks? No one, really ... and
having to load up a fund's portfolio with all these
second-tier ideas seriously harms returns.
But what if ...
The knowledge that fund managers' best ideas tend to
outperform might be profitable for us individual investors if
we knew with certainty which stocks they most loved. One
proxy for determining a fund's favorite ideas might be to
look at its largest holdings. Take, for example, Fidelity
Contrafund (FCNTX), one of the largest funds in the
world:
Fidelity Contrafund
Top Holdings
% Net Assets
Google
5.15
Apple
4.44
Fidelity Cash Central Fund
4.44
Berkshire Hathaway A (NYSE:
BRK-A)
3.67
Wells Fargo (NYSE: WFC)
3.61
Coca-Cola
2.28
McDonald's (NYSE: MCD)
2.17
Gilead Sciences
1.92
Visa (NYSE: V)
1.85
J.P. Morgan Chase
1.72
Qualcomm
1.51
Walt Disney (NYSE: DIS) Continued... |