“The Performance of Mutual Funds in the Period 1945–19196460ya”, 1968-05 ():
[evidence for indexing] The evidence on mutual fund performance discussed above indicates not only that these 115 mutual funds were on average not able to predict security prices well enough to outperform a buy-and-hold policy, but also that there is very little evidence that any individual fund was able to do statistically-significantly better than that which we expected from mere random chance.
It is also important to note that these conclusions hold even when we measure the fund returns gross of management expenses (that is assume their book-keeping, research, and other expenses except brokerage commissions were obtained free). Thus on average the funds apparently were not quite successful enough in their trading activities to recoup even their brokerage expenses. It is also important to remember that we have not considered in this paper the question of diversification. Evidence reported elsewhere (cf. 1967, [“Risk, the Pricing of Capital Assets, and the Evaluation of Investment Portfolios”, PhD thesis]) indicates the funds on average have done an excellent job of minimizing the “insurable” risk born by their shareholders.
Thus the results reported here should not be construed as indicating the mutual funds are not providing a socially desirable service to investors; that question has not been addressed here. The evidence does indicate, however, a pressing need on the part of the funds themselves to evaluate much more closely both the costs and the benefits of their research and trading activities in order to provide investors with maximum possible returns for the level of risk undertaken.