0% is Not a Useful Stock Fund Benchmark

Barry Ritholtz says it's "amazing" that out of 2,100 diversified retail U.S. stock mutual funds open to new investors, just 17 have positive returns for both the past 12 months and year-to-date.

The factoid comes, depressingly enough, from a very complimentary story about a fund manger who runs three of those funds. Her funds are small and expensive (net of fees, you'd still be down for the year) -- and it's impossible to see what her long-term performance is, because she's only been managing these funds since 2006.

But more generally, if you were looking for a fund manager on the basis of year-to-date performance, I'm not sure you'd want one of the few in positive territory. The job of a stock mutual fund manager is to outperform a benchmark, and the benchmark is never a 0% return. (If you want to outperform the 0% return benchmark, you should be in bond funds, not stock funds.)

Looking at funds in this manner is a way of changing the goalposts ex post: once you've asked a fund manager to outperform one benchmark, it's unfair and unhelpful to suddenly hold her to another. And the 0% benchmark is particularly silly for a small-cap mutual fund -- the kind of thing which no one invests in with a primary objective of not losing money.

Given what's happened to stocks generally over the past year, it's hardly surprising that managers who benchmark those stock are in negative territory. The S&P 500 -- the most commonly-used of all benchmarks -- is down more than 11% over the past 12 months: you could outperform that by 10 percentage points and still be in negative territory, thereby counting yourself out of the running for one of those 17 precious spots on the list of fund managers in positive territory year-to-date and over 12 months. It's a very frivolous list indeed, and not one that anybody should use to make mutual-fund investment decisions.

What heartens me, however, is reading the comments on the Marketwatch story. Almost unanimously they pour scorn on the idea that this particular fund manager is genuinely worth listening to, as opposed to being just a random statistical anomaly. Investors are learning: maybe journalists will follow suit.

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