With the Odds on Their Side, They Still Couldn’t Beat the Market (Published 2023) (2024)

It’s awfully hard to beat the stock market consistently. In 2022, despite many advantages, most mutual funds couldn’t do it. There are important lessons in that failure for this year and beyond.

Recall that the S&P 500declined 19.4 percent last year. It was a miserabletimefor just about anyone who held stocks, includingthose who merely tried to match the overall market, as I do, using broadly diversified, low-cost index funds.

But beneath the market’s surfacelast year, there were plenty of opportunitiesthat should have given active stock pickers a competitive advantage over index funds. That’s because the average stock did better than the overall market, which was heavily influenced by a relative handful of “megacap” tech stocks like Alphabet (Google), Amazon, Apple, Meta (Facebook), Microsoft, Nvidia and Tesla. These giants declined sharply, but the rest of the market did markedly better.

That meant the odds actually favored stock pickers last year. They had plenty of companies to choose from, any one of which would have given them a better performance than the overall market. And, in fact, as a group, actively managed mutual funds fared better against the overall market average than they have since 2009.

Even so, the average actively managed stock mutual fund failed to beat the S&P 500. In an interview, Anu R. Ganti, senior director of index investment strategy at S&P Dow Jones Indices, summarized that mediocre performance this way. “Actively managed funds underperformed less badly in 2022 than they have in most years,” she said. “But they still underperformed.”

Tailwinds Helped, but Not Much

In some respects, the failure of actively managed mutual funds to beat the broad market indexes last year is unsurprising. S&P Dow Jones Indices has been running systematic comparisons of actively managed funds and passively managed funds — a.k.a. index funds — since 2001.