It has been well documented by the annual SPIVA reports that retail mutual funds underperform with great persistence, with any persistence not significantly greater than would be randomly expected.
Larry, I saw your post on alpha architect regarding "relative sentiment" factor. That factor research suggests institutions beat retail over the long term. But according to the data here institutions slightly underperform retail over previous 10 years. Does that mean it's a likely temporary underperformance of institutions versus retail or is relative sentiment not robust?
my guess is it's temporary as not a good period for most factors (like value) so the right (short) side of factors (the kind of stocks retail investors tend to buy) may have outperformed. Think Melvin Capital and Gamestop
Gross returns and net returns individual investors underperform as they stocks they buy go on to underperform and the ones they sell go on to outperform. Of course someone has to be on the other side. It's institutions who exploit retail investors. So they outperform on GROSS basis. However once add all the expenses they underperform--just not enough "dumb" retail investors to exploit to overcome expenses. And as explained in my book The Incredible Shrinking Alpha as indexing gains shares there are fewer and fewer victims to exploit, one of the five reasons it's actually getting continually harder to outperform. Read the book to learn the other reasons.
Larry, I saw your post on alpha architect regarding "relative sentiment" factor. That factor research suggests institutions beat retail over the long term. But according to the data here institutions slightly underperform retail over previous 10 years. Does that mean it's a likely temporary underperformance of institutions versus retail or is relative sentiment not robust?
my guess is it's temporary as not a good period for most factors (like value) so the right (short) side of factors (the kind of stocks retail investors tend to buy) may have outperformed. Think Melvin Capital and Gamestop
I knew active was suboptimal, didn’t realize it also applies to institutional investors as well!
Here's the facts.
Gross returns and net returns individual investors underperform as they stocks they buy go on to underperform and the ones they sell go on to outperform. Of course someone has to be on the other side. It's institutions who exploit retail investors. So they outperform on GROSS basis. However once add all the expenses they underperform--just not enough "dumb" retail investors to exploit to overcome expenses. And as explained in my book The Incredible Shrinking Alpha as indexing gains shares there are fewer and fewer victims to exploit, one of the five reasons it's actually getting continually harder to outperform. Read the book to learn the other reasons.