I’m John, and I was an Active Fund Manager: Update
S&P Dow Jones Indices recently published its, “SPIVA U.S. Scorecard,” report, so I thought it would be a good time for me to revisit one of my most popular blog posts.
The summary opening paragraphs are mind blowing, really:
“Global equity markets powered ahead in 2021, despite the ongoing COVID19 pandemic. As rocky vaccine rollouts and new coronavirus variants prolonged the pandemic, governments and central banks continued their strategies of generous fiscal spending and loose monetary policy. The S&P 500® gained 28.7% in 2021, capping an impressive 100.4% cumulative advance over the past three years.
The positive market performance translated into good absolute returns for active fund managers, although relative performance continued to disappoint: 79.6% of domestic equity funds lagged the S&P Composite 1500® in 2021.”
Put a different way, an investor trying to select actively managed funds for their investments had only a one in five chance of them performing as well or better than an index in 2021. But these are professionals, surely, given enough time, they could apply the investment skills that they’re so well paid for to beat the market? Umm…
“Fund managers often respond to evidence of active underperformance by claiming to offer better returns per unit of volatility (i.e., to outperform in risk-adjusted terms). This would be an appropriate counterargument, if only it were true. However, the data shows that the vast majority of actively managed funds underperformed on this metric as well. Among domestic equity funds, while 90% have underperformed the S&P Composite 1500 over the past 20 years, an even greater 95% did so on a risk-adjusted basis.”
The chart below tells a sad story:
The vast majority of people whose advice is all over the internet have never managed money. In fact, most financial advisors haven’t either, aside from that of their own clients. Social media is rife with bloggers, Youtubers, TikTokers, etc. who have never been held responsible by their employers for the performance of their investments, when compared to any kind of benchmark index. And even the ones who are do not outperform on any kind of a regular basis!
Yes, as a former portfolio manager, I am biased. I know exactly how difficult it is to outperform the index. Was I able to do it? Yes, actually. (Please clap). When I look back, however, I realize that the reason I did, as a manager, was because we added risk, or we made bets that just happened to work out for us. This was a fine strategy for a manager to attempt to maximize their bonuses, based as they were on performance vs the benchmark index, but I would strongly argue that this is not at all a prudent strategy to apply to retirement savings.
There are decisions to be made about investments. They include proper asset allocation & asset location. They include rebalancing based on life events or age. They do not, IMO, include making bets in order to, “beat the market.” That’s basically notgonnahappen dot com.
More detail available HERE.
