What the New S&P Dow Jones Study Means for Mutual Funds

A new study of actively managed mutual funds by S&P Dow Jones Indices found that, on average, only a small percentage of mutual funds have beaten the market regularly. The study defines a “beaten the market” fund as one that outperforms its benchmark index by at least 2% over a 12-month period. The study also concluded that the difficulty in finding and investing in a fund that has beaten the market regularly is further compounded by the fact that the majority of actively managed mutual funds have not been able to outperform their benchmarks.

Let's look at Fidelity's new funds and the broader mutual fund to active ETF switch as a case in point. In response to the findings of the S&P Dow Jones study, Fidelity has announced the launch of four new actively managed ETFs. The funds will be run by the same portfolio managers, meaning that investors can benefit from the same disciplined investment process used in Fidelity’s mutual fund lineup, while taking advantage of the cost and tax efficiencies of ETFs.

The S&P Dow Jones study also examined the role of “redeeming” and “switching” of securities in actively managed mutual funds. “Redeeming” involves selling a security to cash out of the fund, while “switching” involves selling one security and buying another. The study found that such trades can add costs and reduce returns, and can also mean that the fund is no longer beating the market.

In light of these findings, the Securities and Exchange Board of India (SEBI) has issued fresh guidelines for mutual funds in India, which include stricter definitions for “connected persons” and “redeeming” and “switching” of securities. Definitions under Chapter II-A. 1. “Connected Person” now contains references to “executive officers” and “significant influence”, while the definition of “Redeeming/Switching” now includes a clear prohibition on “market timing”.

These new guidelines are expected to have far-reaching consequences for the mutual fund industry, as they will make it difficult for fund managers to use redeeming and switching of securities to gain an edge in the markets. The guidelines will also ensure that investors are better protected from potential abuses.

Ultimately, the new S&P Dow Jones study and accompanying guidelines from the SEBI should help to ensure that investors are better informed and more protected in their mutual fund investment. With these new regulations in place, investors can rest assured that their investment are in good hands and that their returns will be maximized.