A new U.S. study says it’s impossible to predict which mutual funds will beat the market indices in any given year and that individual and institutional investors are better served by passive rather than active management.

The study prepared by Edward O’Neal, chief investment officer of investment advisory firm, Florida-based Academic Wealth Management, analyzed data from the June edition of Morningstar’s principal database. O’Neal collected returns on all 494 mutual funds with 10-year track records that Morningstar currently categorizes as large-cap domestic equity funds. He then divided the sample into two five-year periods; July 1993 through June 1998 and July 1998 through June 2003.

O’Neal set out to explore two questions: Does the past performance of a fund manager relative to his peers help in any way to predict performance of the manager in the future?; How consistently do managers perform relative to a reasonable index?

The answers suggest that managers have little ability to consistently outperform their peers or a reasonable index.

To answer the first question, O’Neal ranked the 494 funds on their annualized performance for the first five-year period. The top fund outperformed the average fund by 14.2% per year while the poorest performer underperformed the average fund by 15.9%. Then he re-ranked the funds based on their performance in the second five-year period.

He found that on average there is a negative correlation between the performance in the first period and performance in the second period. Previous-period losers were more likely to outperform pervious-period winners.

O’Neal then compared the performance of these funds to the S&P 500 index. He found that for the first period, only 46% of these funds beat the index. For the second period, only 8% of these funds beat the index. Only 2% of all funds beat the S&P 500 in both five-year periods.

O’Neal says the data adds to the overwhelming academic research indicating that over the long term, efforts to select active managers who investors believe will outperform the index is a zero-sum game. “Individual and institutional investors would be far better served by investing in passively managed funds than in trying to pick more expensive active managers who purport to be able to beat the markets,” he said.