Home—Blog—Fund manager performance - the proof
Jan 19, 2012, 10:03
Posted byMerryn Somerset Webb
Comments (14)
I wrote here a few weeks ago that being a fund manager is more about luck than about skill – and that even if there are managers out there whose returns are the result of genius rather than right-time-right-place luck, it would be impossible to distinguish them from those living a life of non-stop luck.
That made a few people (mostly fund managers I would guess) cross. But I was also lucky enough to get an email from a charming Swiss professor, Jérôme L Kreuser of the RisKontrol Group, who said that not only was I right, but that he could prove it.
He attached a paper written by some of his colleagues, Lester Seigel and Ramasastry Ambarish, which has a go at quantifying just how long it takes to distinguish manager skill from manager luck in the equity markets.
The answer? Up to 175 years. If they are right, then we will never know if anyone (including Anthony Bolton, Neil Woodford and Warren Buffett) is for real or not.
As noted in the FT, “With volatile assets like equities, the reality is that you would need hundreds of years of data to be sure [that one manager’s performance is better than the other].”
Some of you have asked to see the paper, so the point of this post is to show it to you. Read it here: Time is the Essence
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(19 January 2012, 10:25AM) Complain about this comment
MSW,Whats the point in proving that??? even if it can be proved and I dont think you can ( 175 yrs is a long time and I will be too old to analyse the data you would present!) the fact remans that they have ( emphasis on have! ) made their billions! As they say if you cant beat them, side with them :)
(19 January 2012, 10:31AM) Complain about this comment
"As they say if you cant beat them, side with them :)"I don't think you have understood the article.Everyone who sided with the previously successful Anthony Bolton and invested in his China Fund has lost how much ?
(19 January 2012, 11:35AM) Complain about this comment
If you start with 1,000 fund managers and in a simple scenario 50% outperform the stock market and half fail each year and leave the business. After about a decade there would still be 2 "successful" managers based on pure chance. Of course in reality many "failures " stick at it for a few more years, writing off initial failure for whatever reason (usually optimism bias) and having some random successes of their own (maybe every third year). The pool shrinks leaving a handful of heroes. Meanwhile 1,000 more have started trying. Problem is we don't see the failures !!
(19 January 2012, 11:45AM) Complain about this comment
#1 - they make their billions by creaming off fees every year, thats not skill or luck, its systematic.Building and holding a portfolio of shares in profitable companies avoids the fees and will match or beat the best of them in the long run.
(19 January 2012, 01:08PM) Complain about this comment
Just wondering if the fact that movements on the Australian Stock Exchange is the basis for the calculation could be distorting things a little?Maybe the numbers would come out differently if UK or US stocks were used instead. Otherwise, what are we all doing trying to second-guess the markets?
(19 January 2012, 02:55PM) Complain about this comment
Merryn,If no-one is skilful enough to beat the market, does that mean you think everyone should cancel their subscriptions to Money Week?After all the successful calls that you've made could all have been down to luck.
(19 January 2012, 03:24PM) Complain about this comment
This post sits uncomfortably on the front page of the moneyweek website.
(19 January 2012, 04:45PM) Complain about this comment
Fund management is a classic failure of Joe Public to trust himself and to turn to so called "experts". The number of consistently successful ones are very few and the number of tried but failed very large. For every Woodford there are 400 who were ; quite good for a year or two, pretty poor actually,a nice bloke but out of his depth and frankly downright useless. But they all still got their exorbitant fees.In the Sunday Times' annual forecasts only one out of 30 expert forecasters scored over 50% for the 2011 outturn.
(19 January 2012, 07:14PM) Complain about this comment
Ah, so your publication should be called LuckyWeek and have a disclaimer stating that you may as well stick a pin in a list of investment than take any notice of us.Perhaps Steve Jobs was lucky (I'm sure he was to a degree). No doubt Einstein was lucky, as was Mohamed Ali. A professor could no doubt prove this with a nice grant to pay for the research.As a wealth manager, I can choose passive or active (I get paid the same). Thank god most are active managers. You should be talking about value for money or the dog funds.
(19 January 2012, 09:52PM) Complain about this comment
Well I'm quite content to consider my chances of finding management talent based on 2 consecutive 5 year periods of outperformance.Also, I never quite got around to replying to an earlier article, but the fund that charged a performance fee based on quarterly outperformance, (with no high water mark!) is merely incentivised to adopt a portfolio of volatile stock that has a negative correlation with the market. I would strongly advise anyone against investment in that.
(20 January 2012, 09:24PM) Complain about this comment
I patiently wait for someone to actually read “Time is the Essence” and make an intelligent comment on it or analytically refute it. Am I waiting for Godot?
(21 January 2012, 05:13PM) Complain about this comment
As an investment professional who has used this formula for over a decade (and shared with my pension clients) to show how fund managers get compensated for luck, I am glad that you have chosen to feature it. In fact, the late Prof. Modigliani (Nobel Prize winner) and I have used this paper as a key foundation to develop better approaches to evaluating fund managers.
(24 January 2012, 06:22PM) Complain about this comment
It is a pleasure to finally see the issue of luck vs. skill in fund management performance addressed. The Ambarish/Seigel paper appears to be a solid contribution to this topic.
(26 January 2012, 07:53PM) Complain about this comment
I am a novice when it comes to investing in shares and/or unit trusts but I have been doing a lot of research. My absolute conclusion is that all these fund managers/experts survive purely on luck. They have as much chance of picking a winner or loser as I have. Just as an example, I invested in 4 companies after extensive research. The investment is showing an average profit of 12% after three months. A panel of "experts" from a well known national newspaper recommended 9 companies at the beginning of 2011 to invest in. Only 2 of them are showing a profit of less than 8% and the rest have reduced in value. I know we are talking about a short period but it does make me wonder how much trust you should place on these "experts" and wealth managers and perhaps you could save a lot of money by-passing them and just having a go by yourself.As someone said above, if you had followed Anthony Bolton's advice this year, the so-called guru of investing, you would have lost money.
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