Professional Management?

Purveyors of mutual funds tout professional management as an advantage for holding mutual funds: it's tosh.

“Lipper Analytical, a research firm, has found that an unprecedented nine out of every ten American equity mutual funds have this year [1998] performed worse than the S&P 500, Wall Street's main stock market index.” The Economist December 12, 1998 p.75

Norm Rothery's Report on Business column of Dec 3 2011 dealt with returns (gains + dividends) from Canadian equity mutual funds over the last five years. After fees, the average annual return was less than one percent a year (0.96). Professional money managers run these funds! HELLO!

“Professional money managers, who should do far better than individual investors, usually do not. Although they are trained to do investment work, and they spend most of their time doing it, they are often too worried about their clients' looking over their shoulders. Many thus perform poorly despite their intelligence, degrees, data sources, and computer power. ” Relative Dividend Yield by Anthony E. Spare (Wiley, 1992) p. 124

“Beating the market isn't easy…only about 10% of managers are able to accomplish this in any decade” Contrarian Investment Strategies by David Dreman (Simon & Schuster, 1998) p.155

“Over the past ten years, the Toronto Stock Exchange 300-stock index has beaten 67 per cent of the funds run by active managers.” Duff Young, Report on Business Feb 13, 1999

“One of the few certainties in the investment world is that when annual performance figures for professional fund managers are published, the great majority (75% or more) will have under performed the returns produced by the market itself.” The Economist June 13, 1998

“Of 7,000 mutual funds, only 1 in 10 beats the S&P 500 in any 10-year period. The winners dwindle if you go out 15 years or more.” David Dreman, Forbes August 24, 1998

Think about it: “As a group, they [professionals] can't be right.” Forbes April 19, 1999 p.406

“The S&P 500 index beat 87 percent of managed equity funds in 1998, and has outperformed by similar margins over the past three years.” (Barron's May 10,1999) “…with rare exceptions, traditional fund managers have been underperforming their benchmarks for years.” The Economist May 29, 1999 p.69

“…84% of the actively managed funds failed to match the 17.8% annual return of the TSE 300 index over the five years ended Jan.31 [1998].” Report on Business Feb 28, 1998 - Duff Young

“Active fund managers are seldom able to beat the markets” Ted Cadsky, President CIBC Wood Gundy Securities Report on Business Oct 6, 1998 p.20

“Actively managed funds have been handily beaten by no-brainer index funds for most of this decade.” Headline of Net Worth page, Report on Business October 9, 1999

“And according to Lipper Inc. of Summit, N.J., a paltry 6% of the U.S. general equity funds beat the return on the S&P 500 for the period between 1994 and 1999.” Report on Business October 9, 1999

“It's extremely difficult for any one manager to consistently deliver top-quartile performance year in and year out” Report on Business Oct 30, 1999 - paraphrase from a study by Frank Russell Co.

“The marketplace where fund managers operate is smarter and more sophisticated than it used to be. So, with more professionals trying to edge each other out, performance is going to tend toward the mean.” Gordon Powers - Report on Business October 30, 1999

“For decades active managers of U.S. equities have badly lagged the S&P500.” Kenneth L.. Fisher, Forbes, December 13, 1999

“Fees are eating into returns and they (clients) can get better performance for less cost elsewhere.” Investment Executive - editorial in enlarged print - Nov 1999

“the analytical skills at work in the paneled offices were no better than mine, and often worse” John Neff on Investing (Wiley, 1999) p46“millions who put their trust in mutual fund managers have missed out on market gains once again.” Report on Business - front page - February 7, 2000

If you still think professionals can manage money better, read When Genius Failed: The Rise and Fall of Long-Term Capital Management by R. Lowenstein, Random House, Jan 2000

“Professional management does not ensure that investors will receive competitive returns, or even positive returns” American Investment Services, Investment Guide February, 2001

  • THROW DARTS: You might as well invest yourself, if you have some degree of patience and discipline, as professional managers 'do not provide extra profits.” The latest example I found of poor professional management was in the Economist of February 6th 2010 under the title of 'Norway's pension fund, Passive aggressive - A row over the world's second largest sovereign fund.' In 2008, the Norwegian pension fund's equities holdings dropped by around 40%. As I remember, our drop* was just a bit less. The government asked for a review of the fund's active management. Three business-school academics looked into it. “The three professors found that for all their stock-picking and do-gooding, the fund's managers could just as well have thrown darts at a board.” Don't you just love it! Taking the crash into account, the Economist said, the $444 billion oil fund's performance was essentially indistinguishable from that of a passively managed index fund. One of the professors, Espen Sirnes of the University of Tromso said, “The evidence points to the fact that over time managers do not provide extra profits.” * Our prices dropped also, but our dividends increased.
  • RETURN_CHASING: A new study (2010) by researchers at the European School of Management and Technology examined how investors allocated money to hedge funds from 1994 to 2004. Hedge fund investors are richer. They take advice from private bankers and investment consultants. How did these professionals select hedge funds for their wealthy clients? Not well. The academics found that one selection reason stood out: recent performance. “Funds that had performed well in the previous three quarters attracted significantly more money. ” Valuations rose. “Those higher valuations have duly led to lower returns” Buttonwood said in his May 29th Economist column “Who’s the patsy?” It is a classic case of selection failure. TC: We try not to buy expensive stock, by using yield, Graham’s value and P/E. The message: professional money managers are no better at controlling their behaviour.
professional_management.txt · Last modified: 2011/12/05 12:26 by tom
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