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90% of managers beat their benchmarks (?)

David_Snowball
in Fund Discussions
Chuck Jaffe just published an article based on research from a group called AthenaInvest. The firm specializes in behavioral finance, advises the AdvisorShare active ETFs and has its own fund rating scheme (Diamonds, not Stars.). I haven't seen the original report yet because it's password-protected. Here's the snippet from Jaffe:
Howard is relying on a wide range of research, some of it his own but also several studies from 2013, showing that 80% or more of equity-fund managers beat their benchmark until the burden of fees and costs come into play.
It makes an interesting claim that would, if born out, be reassuring and useful.

At base, they argue that the average stock manager demonstrates sufficient skill to outperform his or her benchmark by an amount greater than the fund's expense ratio. Most, however, are not able to leverage that skill to their investors' benefit because of three self-inflicted injuries: (1) asset bloat, (2) closet indexing and (3) over-diversification.

I'm sympathetic to the conclusion and Chuck quotes me ranting about the industry's shortsightedness and penchant for taking aim at their own feet. Nonetheless, I don't have sufficient understanding of the research to know whether this is anything more than wishful thinking.

Chuck has offered to put me in contact with the study's authors. If that works out, I'll surely share what I learn.

David

Comments

  • Old_JoeOld_Joe
    Hi David- I wouldn't actually be very surprised if that proposition is true. There must be a great number of fund managers who have enough intelligence, pride and ego to outperform their benchmarks, but the "results" deck is stacked against them also, probably to the extent that in order to achieve really remarkable returns luck becomes a major factor. That would also explain the typical lack of long-term consistency in managerial results.

    OJ
  • TedTed
    @MFO Members: Here Is Chuck Jaffe's interview of Tom Howard on his 1/14/15 show. (Click On Download)
    Regards,
    Ted
    http://www.moneylifeshow.com/highlights.asp
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