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managed funds

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Source: Business Profiles


Hat tip Josh  (via Daily Infographic)

Category: Digital Media, Hedge Funds, Mutual Funds

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “Skill vs Cost: The Myth of the Successful Money Manager”

  1. cornbin says:

    BR, I love these infographics and agree with your premise in general (that of the myth of the successful money manager). However, aren’t we cherrypicking a bit here? What would the same analysis look like in the time period between 1966 and 1982? From 1999 to now? from 1982 to 1999?

  2. ckaussner says:

    I agree wholeheartedly with the article but suspect many retail investors are better off with a professional money manager because most people don’t have the discipline to leave their long term investments alone. How many retail investors got out of the market after it collapsed and are getting back in now that we’re at/above all time highs?

  3. Stock Soup says:

    Nice summary. Thanks.

    I wonder, what if your in a long / short equity only hedge fund who is (I’ll make this up) 80% long / 60% short thus being net 20% long and
    - he is only up 10% this year vs 25% for the S&P
    – but was only down 10% in 2008 when the market was down 40%.

    Is it worth it to seek out such investments, and make them part of one’s overall portfolio?

  4. DismalEconomist says:

    I agree that for the average investor, index funds are the way to go, mainly because most funds are simply closet index funds anyway and what little money I have is invested in index ETFs.

    That being said, I have to wonder if the benchmarks have a 10 metre head start in the 100 metre dash against active managers. The benchmark index doesn’t have to actually transact and buy shares or units, it doesn’t have to have branches and offices where clients can go to meet with financial advisors or money managers, it doesn’t have to produce record keeping for clients, it doesn’t have to do any marketing or financial plan building…you get the point. So if you have to cover the cost of all those things you are running a race where your opponent has a big head start.

    The other irony is that if all investors chose the passive approach it would likely lead to big arbitrage opportunities for active managers. I’ll keep buying passive index funds as long as the majority still think active management can produce alpha net of fees, but if that changed the relative value of the active manager would start to go up.

  5. ihatepugs says:

    One nuance: you can’t invest directly in any of those indexes. you’d need to use an etf or derivatives, and those all come with costs. Pretty sure when they compare returns they neglect these fees for the index but include them for the managed funds?

  6. Ezra Abrams says:

    Barry – can you one day explain mutual vs etf ?
    most of the socalled advantages of etfs (you can trade them anytime) are either irrelevant or a disadvantage (isn’t trading anytime what is bad ???)

    so far as i can tell, the only big diff is what the fund pays to buy the stock, and the cap gain on selling; on the last point, I think etfs come out ahead

  7. RyanT says:

    I agree in a general sense, but you know what they say about statistics…

    I don’t know what exactly their managed funds universe consists of, but I wouldn’t be surprised if a majority of funds in existence are simply closet indexers designed to rake in the largest MER possible. Many in-house managed products are exactly that, and exist simply to separate clients from their money.

    It is unfair to group genuine money managers with those con-artists.

    I believe that managers who warrant their MER do exist, and I hope you consider yourself to be one of them.

  8. JasRas says:

    On the surface this makes sense, yet it implies that once you pick a mutual fund you should never sell it. Sadly, this is the only way this argument remotely makes sense, because even the most notable efficient market proponents will freely admit that active managers can and do have periods of outperformance. Their main assertion is all revert to the mean or worse, and frankly that is pretty irrefutable. This is not a reason to give up on active management though. It is a reason to MANAGE your active managers. Managing your portfolio of mutual funds might require help. There needs to be a process involved and someone to pull the trigger. Yes, yes this involves taxable events in non-qualified accounts, and if you hire expertise, there is some slippage from fee, but there is not reason to settle for C and D performance numbers from mindless ETFs when one can identify and select the A and B performance of excellent active managers.

    I still can’t figure out why in a world that knows statistics exists, that there isn’t a realization that mutual funds are just another pool of data that forms a bell curve. Buy the stuff to the right, sell when in the middle, avoid the left… It isn’t that hard, yet people make it so and use Nobel Prize winning research about long periods of time to justify poor decisions over shorter periods of time. Please don’t use intelligent thought to lower your expectations…

    **All this said…ETF would be great in 401k’s b/c your choices are extremely limited and usually are made up of sub-par managers… With limited choices, ETFs would be a gift to most 401k programs I’ve seen…

  9. pgerlings says:

    Another nuance – timing is everything. Too many investors put money into funds only after they’ve done well (resulting in more expensive securities, at the time of purchase – all other things being equal), and pull money out only after a fund has done poorly. This reduces the holding period return, but also compounds the relative variability in manager returns. If a capacity constrained fund (say, small cap equity) sees too much money flow in (which often happens after prior period of strong relative performance), trading becomes much more difficult, and managers often begin to capitalization-weight their portfolios, which means buying yesterday’s stock winners. Performance will invariably suffer as a result.

    Being contrarian, at both the asset class level as well as the manager selection level, will make a positive difference over the long run. Unfortunately, the way we’re hard wired as a species makes it very difficult to do this from a psychological perspective.