Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 213-215

Despite the serious lag of mutual fund returns during the great bull market, one out of every six managed equity funds succeeded in outpacing the market's return. Of the 258 general equity funds that survived that period (the industry was far smaller in 1982), 42 succeeded in outpacing the 18.9 percent return of the Wilshire 5000 Equity Index (a lower hurdle, to be sure, than the 19.8 percent return of the S&P 500 Index). But only 12 of those 42 (one of every 21 survivors) did so by a margin of 1.5 percentage points. If we assume that the funds' annual tracking error, relative to the index, was a fairly modest 3 percent, then only a return of 1.5 percent in excess of the index return would represent statistically significant outperformance. Based on their actual tracking errors, only 3 of the 12 funds - only about one in each 100 - cleared the hurdle of statistical significance. Nonetheless, it's instructive to examine all 12 funds.

A bit of microanalysis shows that these 12 funds were a rather motley group. Six carved out their entire long-term margins in the early years, when their assets were small, and have been mediocre performers for years. That leaves six legitimate top performers. Interestingly, and importantly, all six had the same portfolio managers throughout all or most of the period (the managers' average age is now 57); two closed to new cash flow before their assets reached $1 billion.

The 12 winners could not have been easy to identify in advance; at the outset, their shares were owned by relatively few fund investors. (Their aggregate 1982 assets totaled $1.8 billion, only 3 percent of total equity fund assets.) In any event, despite their acknowledged past success, no one can be sure of the extent to which it may recur in the future, whether or not their managers stay on the job or retire and rest on their laurels. Today, could investors be highly confident of superior returns if they selected one of the four legitimate fund champions that remain open to investors? It would seem, at best, a counterintuitive decision for an intelligent investor.