A variety of studies have found that money managers who actively select stocks aren't able to outperform the market. Many investors are not aware of this because of the publicity received by great investors like Peter Lynch, Mario Gabelli, John Templeton etc. It turns out that for every investor stud, there are dozens of duds. Moreover, today's stud on average will perform just about as well tommorow as today's dud (indicating that you shouldn't pay much attention to mutual fund ads which show how high their historical returns have been).
THE LAKONISHOK, SHLEIFER AND VISHNY STUDY
Lakonishok, Shleifer and Vishny are college professors (and money managers) who examined the returns to 769 all-equity actively-managed pension funds between 1983 and 1989. In all, these funds had 341 different managers and followed a variety of strategies including growth, value and yield. As indicated in the chart below, the average mutual fund in the study underperformed the S&P 500 stock index.
This shouldn't be too surprising because funds charge management fees which average a little over one percent a year. If the funds weren't able to outperform the market, then we'd expect that the average fund would return about one percent less than the market does each year.
Also, Lakonishok, Shleifer & Vishny found that funds which did well in one year did not do any better in the next year than funds which had done poorly. The following chart shows these results. In the chart, funds are divided into performance quartiles. Quartile 1 is the group of funds with the highest returns while quartile 4 is the group with the lowest return. The chart shows, for example, that a fund in the top quartile this year has a 27 percent chance of being in the top quartile next year (showing very slight persistence).
For more information read: "The Structure and Performance of the Money Management Industry," by Josef Lakonishok, Andrei Shleifer and Robert W. Vishny, Brookings Papers on Economic Activity 1992, p. 339-391.