Fund Managers Rarely Outperform
Browse the money section of your preferred weekend newspaper and you would be forgiven for thinking that fund managers routinely beat the market. Of course, some do but the clear majority do not. To make matters worse the list of ‘star’ managers currently beating the market changes from year to year. So, we are left wondering, can you reliably spot the winning managers in advance and can you then discern between skill and luck?
Active managers have no shortage of media or data championing their achievements, likewise there is no shortage of media or data offering an opposing view. One such article from The Economist titled ‘Fund managers rarely outperform the market for long’ gets to the heart of the matter: Yes, some active fund managers beat the market. But they rarely do so for long; as can be seen below, ‘star managers’ rarely persist for more than a year or two at best.
The Economist piece can be found here.
Like The Economist, we source data from S&P Dow Jones’ SPIVA and make no apologies for our frequent SPIVA references; SPIVA is the definitive active vs. passive scorekeeper.
The latest SPIVA U.S. Scorecard was issued last week and notes that 2017 was a good year for active managers with only 63% of large-cap equity funds in the U.S. underperforming the benchmark over 12 months. Generally, the longer the term, then the more managers underperform. According to the latest SPIVA U.S. Scorecard 84.23% of large-cap managers lagged their respective benchmarks over a five-year period and a whopping 92.33% lagged their respective benchmarks over a 15-year period.
Linking back to the above table taken from The Economist, the latest SPIVA Scorecard points out that “Funds disappear at a meaningful rate. Over the 15-year period, 58% of domestic equity funds, 55% of international equity funds, and an average of 48% of all fixed income funds were merged or liquidated. This finding highlights the importance of addressing survivorship bias in mutual fund analysis”. Funds that are labelled ‘dogs’ or that are otherwise deemed unattractive to existing and new investors disappeared from fund house data as they are closed or merged with other more marketable funds. The savvy investor needs to be aware of survivorship bias when comparing league tables of funds demonstrating performance worthy of some column inches in Sunday money sections.
The story told by the latest SPIVA U.S. Scorecard is not unique. Tellingly, similar patterns persist across all other investable markets and time periods.
Like many, we too invest based on robust academic principles rather than by making (un)educated guesses about which manager might outperform next. How about you?
One of the Private Capital team saw Prof. Ken French end a lecture by reminding the audience to “resist the siren call of active managers”. Sage advice when confronted with the Sunday Money Supplement.