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A Gift From Active Managers

September 5, 2011 Leave a comment Go to comments

A National Post article reveals that actively managed mutual funds (apparently in the US) are under-performing their benchmarks this year by the greatest degree in the last 14 years. While some of this may simple by due to overwhelming fees, I’m sure a part of it is from actual investment performance. Which means they are giving money away to those who receive average or above-average performance.

Even better, this report is only year-to-date. Over a full year or a period of several years we know the frequency of under-performance increases. Some of those not included in the under-performance mentioned here simply got lucky for a while. The article quotes an equity strategist saying that the under-performing funds are likely to take more risks, raising markets by the end of the year. But if the managers are only allowed to shift capital between different stocks and can’t convince investors to put in more capital, the effect will be neutral on the broad indexes and more volatility at the individual stock and focused index level.

As index investors we not only benefit from the managers who buy high and sell low, we also benefit from their investors who often leave the under-performers for today’s hot funds. As many studies show, this often compounds the under-performance and leads to even worse results since the funds that do well are doing so with less capital.

As someone who proudly gets very average returns, I would like to say Thank You to active managers and performance-chasing investors who make the average look good!

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