By Brian Puckett
Across the decades and around the world, a multitude of academic studies have scrutinized active manager performance and consistently found it lacking. Among the earliest such studies is Michael Jensen’s 1967 paper, “The Performance of Mutual Funds in the Period 1945–1964.” He concluded that there was “very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance.”
A more recent landmark study is Eugene Fama’s and Kenneth French’s “Luck Versus Skill in the Cross Section of Mutual Fund Returns,” from 2009. Fama and French demonstrated that “the high costs of active management show up intact as lower returns to investors.”
In the decades between those two studies, as 100 similar studies, published by a who’s-who of academic luminaries, have echoed the findings of Jensen, Fama and French. In 2011, the Netherlands Authority for the Financial Markets (AFM) scrutinized this body of research and concluded: “Selecting active funds in advance that will achieve outperformance after deduction of costs is … exceptionally difficult.”
Can hedge fund managers and similar experts fare better than mutual fund managers? The evidence suggests not. For example, a March 2014 Barron’s column took a look at hedge fund survivorship. The author reported that nearly 10% of hedge funds existing at the beginning of 2013 had closed by year-end, and nearly half of the hedge funds available five years prior were no longer available (presumably due to poor performance).
So far, we’ve been assessing some of the reasons it’s hard to “beat” the market. The good news is that there is a simple way to let the market do what it does best on your behalf. In our next few blogs, we’ll begin to explain how.
For more, please visit http://www.alignmywealth.com/blog
Brian Puckett | JD, CPA, PFS, CFP®
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