New Research Suggests Index Funds > Mutual Funds
In Fama and French’s new paper “Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates,” they find that mutual fund managers do not skills to earn expected returns above the market portfolio. This result contrasts with the findings in Kosowski, Timmermann and White (2006) who find a set of mutual fund managers for 1975 – 2002 did outperform the market (not because of luck). Fama and French argue that these earlier results are suspect because the bootstraps ignored “common variation is fund returns.” Also, the different sample period and assumptions for sample inclusion may create data issues and survival bias. It will be interesting to see how this paper does in the next year or so.