Hedge funds

1% Of Fund Managers Consistently Beat Indices: Skill Or Luck?

Research by the Pensions Institute, based at Cass Business School in London, shows that just one in a hundred fund managers is able to beat the market consistently. It also concludes that even if you’re lucky enough to have identified those 1% of fund managers in advance, you’ll end up paying back any value they add in charges.

1% Of Fund Managers Consistently Beat Indices: Skill Or Luck?

Only 1% Of Fund Managers Consistently Beat The Market


Hello again.

Fund managers are the rock stars of the investment world.

They command huge salaries and their names are all over the financial media.

But do they really deserve their stellar status?

New research suggests that ninety-nine per cent (99%) of them don’t.

Researchers at the Pensions Institute, based at Cass Business School in London, examined 516 UK equity funds between 1998 and 2008, and found that just 1% of managers were able to return more than the trading and operating costs they incurred.

But even those managers pocketed for themselves any value they added in fees, leaving nothing for the investor.

All the other managers failed to deliver any outperformance – either from stock selection or from market timing.

Now, as we’ve said before, the evidence suggests that luck often plays a bigger part in investment returns than skill. So, let’s be charitable… Perhaps the remaining ninety-nine per cent of managers were simply unlucky?

Well, the study was conducted using a statistical technique bootstrapping, which allowed the researchers to isolate returns which a manager could only have achieved by luck.

Their conclusion was that the vast majority of fund managers weren’t just unlucky; they were “genuinely unskilled”.

So, there are real “stars” out there, but they represent only a tiny fraction of fund managers.

The challenge, of course, is working out who the top performers are going to be over, say, the next ten or 20 years.

Star managers are, to quote the report, “incredibly hard to identify”. Furthermore, it takes 22 years of performance data to be 90% sure that a particular manager’s outperformance is genuinely down to skill.

For most investors, the report concludes, “it is simply not worth paying the vast majority of fund managers to actively manage their assets”.

This report clearly makes very uncomfortable reading for the fund management industry.

It’s awkward, too, for most financial advisers, who’ve built their businesses around the idea that successful investing is all about picking the right manager.

The good news, though, is that you don’t need to pay over the odds for an active manager who will most likely fail to outperform anyway.

On the new Sensible Investing website, you’ll find a host of video and other content, all about passive and evidence-based investing, which is very much cheaper, and a far better option for the average investor.

You can also download the Pensions Institute report we’ve just been talking about from the “Reports and downloads” section.

Until next time, thanks for watching and goodbye.


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