Our friends over at NerdWallet published an article a couple of years ago regarding a ten year study of active mutual fund managers and their ability to outperform the index.
“Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index”, March 27, 2013, By Maxime Rieman.
The study’s findings concluded that only 1 in 4 active managers beat the market for the ten year period.
“Active managers beat the market by an average of 0.12% before fees, but charge more than the value they create.”
“Index funds outperform the market on average by 0.80% annually, but active managers have lower risk.”
The study essentially concluded that passive indexing outperforms active managers when taking fees into account. That’s not new, but it continues to confirm what we as investment professionals have known. What was interesting is that the study concluded that risk adjusted returns after fees, were almost identical, meaning that active managers are returning a better return when risk is factored into the equation. You may recall that last week we explored risk exposures imbedded in unmanaged index funds and the perils associated with ignoring those risk exposures.
So if we could come up with an investment solution that combines the risk management of an active asset manager, AND the fee structure of a passive index fund, we would REALLY have something. The result would be consistent, positive, alpha generating investment performance in excess of fees, and an actively managed risk process assuring us that risk exposures would be minimized.
If you were looking for a working definition of Portfolio Replication, we now have it. Active management, proactive risk management, and passive pricing…IT’S HERE.
See your mother was not entirely right; you can have your cake and eat it too!!