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The concept of outperformance came up in a conversation between Tim and I recently.

Genuine long term outperformance of a market or other benchmark is a scarce commodity, and there are far too many claims of above average performance among fund and managers for them to be plausible.

A subject that was touched on by the BetaFolio blog in a recent post used this quote from US author Garrison Keillor to illustrate the point.

โ€œWelcome to Lake Wobegon, where all the women are strong, all the men are good-looking, and all the children are above averageโ€

And as the blog reminds us, for an average to have any relevance, half of the sample group will (by definition) be below average.

The thrust of the article was to encourage investors to always question performance claims and to always check the benchmark that they are measured against, because fund marketers have been known to pick low hanging fruit for comparative purposes.

With that in mind, what does the situation look like if we compare actively managed fund performance against a benchmark that's hard to dispute or argue with, such as the S&P 500 index.

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Well the chart below from S&P sheds light on that, and shows that over the last 5 years less than 25% of US large cap funds have outperformed the index.


The figures do look a lot better over 3, or even 1 year, at +30.29% and 39.67% respectively. However, as investors and traders we should be interested in persistent alpha. A winning edge that endures over time, because thatโ€™s how money is made and how capital appreciates and compounds.

As an aside, if we look at the data for other markets we find that less than 14% of Brazilian equity funds outperformed the S&P country benchmark over five years, whilst in Canada just 1.37% of funds have beaten the TSX composite over that time frame.

So what sort of funds have outperformed the S&P 500 over the last five years?

Well Investors Business Daily recently crunched the data and in fact went so far as to consider 10 year performance relative to the broad based US equity benchmark.

The table above shows the best performing US diversified mutual funds and their relative performance compared to the S&P 500.

The table below shows us the same data but for growth funds...

There are several common denominators between the two tables.

Let's focus on Morgan Stanleyโ€™s Insight funds and the growth fund in particular and take a look at the composition that has consistently outperformed to deliver a one year return of +115%, a five year average return of 32.17% and a 10 year average return of 23.12% ย by the end of March 2021, when the data was compiled.

Morgan Stanley Insight Growth Fund Composition ๐Ÿ‘‡

Morgan Stanley Insight Growth Fund Top Holdings ๐Ÿ‘‡

No surprises here with shareholdings in companies that make a living through social media, online shopping, e-commerce, payment solutions and cloud computing, all sectors which have done well during the pandemic but which were seeing growth in their sector prior to it as well.

The fund's mandate is to seek long term capital appreciation by investing in growth oriented equities.

But of course there's more to it than that.

The fund managers look for businesses with a sustainable competitive advantage, high rates of return on capital employed, with strong balance sheets and an โ€œattractive risk reward ratioโ€.

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The fund managers are also focused on the long term and tend to ignore the short term market noise that surrounds many of these stocks. The funds management team have more than 130 years of combined investment experience between them.

All of which sounds like a very sensible and very effective investment rationale or strategy, but if we dig a bit deeper we find that much of the fund's performance and asset growth ย has been generated in the last 18 months and that this surge to the upside has flattered the longer term average returns.

That should not take anything away from the very impressive performance that the fund has achieved. The style choice and asset allocation have perfectly captured the market zeitgeist over the last year and a half and have produced returns that are approaching ย 6 times that of the S&P 500.

The question now of course is how will the fund perform as and when the investing landscape changes.

As Bank of America reminded us recently, growth stocks did not fare well in the 2013 taper tantrum, though they did recover strongly later in that year.

Definitely something to watch in the coming weeks...

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