Index Funds Are Best Bet, According to Berk’s Award-Winning Article

Unless an investor has an “in” finding a good mutual fund manager, investors are better off sticking with index funds over the long haul. So says an award-winning article by Jonathan Berk, associate professor of finance at the University of California’s Haas School of Business.

Berk’s article recently won an award on scholarly writing from the financial services firm TIAA-CREF. Berk concludes that actively managed mutual funds perform no better than index funds. Additionally, he writes, past performance is no indicator of future returns.

In the article “Mutual Fund Flows and Performance in Rational Markets,” published in the Journal of Political Economy, Berk and co-author Richard C. Green of Carnegie Mellon University found that some mutual fund managers are talented enough to beat the market when their fund is small. But as investors become aware of their skills, their funds grow while performance deteriorates. 

“People didn’t understand why money flowed to mutual fund managers that did well, because if you look at the data, the past is no predictor that the fund will do well in the future,” Berk says. “ ... The reason why mutual fund returns are unpredictable is precisely because of the flow of funds from investors.”

Berk’s research was one of two articles to win the 2005 TIAA-CREF Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security. To access the article, see: “Mutual Fund Flows and Performance in Rational Markets.”

BRIEFLY―Jesse H. Jones Graduate School of Management Associate Professor Douglas A. Schuler has been named winner of the 2005-2006 Rice University Faculty Service Award, presented by the university’s graduate student association ... Lynda de la Viña, business dean at The University of Texas at San Antonio College of Business, has been awarded the Oppenheimer Achievement Award, which honors the achievements of San Antonio women. 

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