Assets under management in the fund went from $3.5 billion before the pandemic to more than $50 billion a year later. But that money flow has now gone into reverse. Big-time. While the Dow is only down a few percentage points from its recent high, shares of the Ark Innovation fund are down more than a third since mid-February. It now has just $22.3 billion in assets. Massive underperformance like this by a star fund manager must be the exception, not the rule, right? Hardly. As I explain in the book, it's widely known in the investment industry that 3 out of 4 fund managers - despite collecting billions in fees - underperform their benchmark each year. Over a period of a decade or more, over 90% of them do. And that includes the best of the best. Analyst Meb Faber notes that not one of the five Morningstar 2010 "fund managers of the decade" managed to beat the market for the past 10 years. In fact, the best manager of the bunch - Bruce Berkowitz of the Fairholme Fund - became the worst. As The Wall Street Journal recently pointed out, "Star managers can be dangerous to your wealth." How do all those smart men and women end up delivering mediocre performance... or worse? There are several reasons, but here are four primary ones: - Markets are efficient. Rational, self-interested investors quickly price all relevant information into publicly traded securities, as soon as it becomes available. That's why beating the market is difficult under any circumstances.
- Fund fees and expenses eat into returns. Remember, these managers don't have to just beat the market. They have to do it after covering all their costs.
- Mutual funds have to hold cash to meet redemptions. And cash is a drag on performance.
- Every hot sector turns cold eventually. When a fund invests in a narrow sector - like cryptocurrencies or natural resources or "disruptive technologies" - they will ride the wave only as long as it lasts. Most waves eventually crash on the beach.
The bottom line? When the fund industry prints its famous disclaimer, "Past performance is no guarantee of future results," that's not just boilerplate. The best actively managed funds eventually merge with the also-rans... and begin a cycle of underperformance. That's why more than half of all institutional monies are now invested using indexing strategies. In the April 2, 1990, issue of Barron's, Peter Lynch - the greatest equity fund manager of all time - said, "[Most investors would] be better off in an index fund." In his 1996 letter to Berkshire Hathaway shareholders, Warren Buffett said, "The best way to own common stocks is through an index fund." The nation's most sophisticated institutions and successful money managers advocate indexing. It should be the foundation of your own investment program. But which indexes should you own and in what percentages? That's all spelled out in The Gone Fishin' Portfolio. (Hint: The S&P 500 is not one of them.) The book is expected to sell out again soon. But if you'd like to pick up copies for family and friends while it's still available, click here. Good investing, Alex | 
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