More Research Casts Doubts on Actively Managed Funds

There’s no shortage of data indicating that mutual funds with investment mandates within efficient markets (i.e. large developed stock markets like the US and Canada) have a tough task beating their benchmarks after accounting for fees. Standard and Poor’s puts out a quarterly scorecard which routinely shows that less than 15% of all of these funds are able to do just that (the SPIVA scorecards – Standard and Poor’s Index Versus Active scorecards).

But an academic paper covered in the New York Times indicates that once you account for ‘luck’, only 0.6% of active managers can actually beat the index due to skill – which the researchers claim is statistically close enough to zero to effectively BE zero. The paper uses analysis methods that are designed to account for ‘False Discoveries’ – which is important because it means that they can better identify when performance of a fund beat the index due to skill and when it was just due to chance.

One of the main reasons cited by the authors is that these markets have become even more efficient with the advent and proliferation of information and information distribution (i.e. the internet). Other reasons include the drag created by the fees, and the growth of the hedge fund industry which offers bigger paychecks for managers (and generally speaking, talent follows the money).

You can read the article from the New York Times by clicking here.

You can read the academic paper by clicking here to download it.

Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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