More bad news for managed funds

84% of US funds failed to beat the benchmark last year. We think individual investors can do better

a woman

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On Saturday, my Foolish colleague Mike King wrote an article outlining the poor performance of Australian long-only equity funds.

A full 94% of them lost money over the past 12 months.

Only 7 out of the 105 surveyed made money for their clients.

Sure, you say, but it was a bad year for the market – and you're right. Except that the median return was -6.9% – worse than the index return. In what was already a poor year, the combinations of fees, commissions and stock picking meant the median fund did worse than the average.

More bad news for managed funds

Lest you think this was a rogue result, or confined to Australia, Standard & Poors have done their own research on US funds. The results were equally poor.

84% of US Domestic Funds lost to the benchmark S&P Composite 1500 last year – the worst result in 10 years. The average for the last decade is 56.6%.

The best (and I use that advisedly) category of fund performance was Large Cap Value Funds, with 'only' 54.3% losing to the S&P 500 Value benchmark.

Close enough?

Some of our more fair-minded (and arithmetically inclined) readers would say that 54.3% is close enough to half beating the average and half losing… a reasonable mathematical spread. They'd be right if this was a game of simple averages and statistical distributions.

The problem is that the funds management industry holds itself out to investors as a better way to invest – the collective intellect and experience of the people employed to improve your returns – and they charge accordingly.

There are winners…

To be fair, we need to highlight that the results are just averages. They make wonderful headlines. But we shouldn't tar everyone with the same brush.

Some funds actually beat the benchmark, and don't deserve to be lumped in with the others. If a fund can consistently outperform a benchmark index, they are indeed worth of consideration. The key here is 'consistently' – make sure the fund isn't just having one or two good years.

…but be careful of appearances

If you're going to consider a fund, don't just look at the brand on the front, or the performance table at the back… these are two necessary steps, but your work isn't done yet. Performance is driven not by the brand on the business card, but by the man or woman making the calls.

We've all seen football teams have a few years of success before losing some key players and underperforming thereafter. Equally, the Australian cricket team is nowhere near as potent without Messrs Warne, McGrath, Gilchrist and Hayden in the side.

Yes, organisations can support success. Culture, training, environment and management can all influence the next generation, but nothing can replace experience and skill.

Foolish take-away

It will be no surprise to you that we at The Motley Fool believe the best person to look after your money is you. We believe that with a little education and experience an individual investor can either track the index return (often with vastly lower fees) or choose individual companies that stand a better than average chance of beating the market.

It also allows you to avoid owning businesses that you don't want to own. Personally, I don't want to own airline businesses such as Virgin Australia Holdings Ltd (ASX: VAH) and Qantas Airways Limited (ASX: QAN), capital-intensive, commodity businesses such as OneSteel Limited (ASX: OST) and BlueScope Steel Limited (ASX: BSL) or highly concentrated miners with a feast-or-famine business model such as Fortescue Metals Group Limited (ASX: FMG) or Rio Tinto Limited (ASX:RIO). Most indexes and managed funds will have exposure to most, if not all of the above companies.

Not committing funds to these companies means more money in my pocket to invest in my best ideas.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

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Scott Phillips is a Motley Fool investment analyst. Scott doesn't own shares in any companies mentioned. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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