Index funds are rapidly gaining market share. But most individual investors still invest in actively managed mutual funds.
They often select actively managed funds based on rankings from various sources.
These rankings are often flawed but few investors understand this fact.
Over a 15-year period, more than half of actively managed funds go out of business or are merged.
They typically do so because of poor performance.
Many rankings don’t include these funds. They only consider funds that survived for the full period.
Let’s say a fund family started a 15-year period with 20 funds, but 10 of them went out of business during that period.
The fund family could state 100% of its funds “beat the market”, when only 50% of them did.
It’s inherently misleading.
Technically, this deception is called “survivorship bias.”
I call it “fraud.”