Getting Lucky

Are the top money managers good? Or just lucky?

Sometimes it’s hard to tell. When Gene Fama and Ken French studied outperforming money managers years ago, they found that most of them were just taking big risks. Thus was born the most humble formulation of the Efficient Market Hypothesis: the market is really hard to beat.

They have a good point. A few years ago I was interviewing international equity managers, and when I examined one who seemed to consistently beat the global developed markets, it turned out that he had a big stake in Brazil and China. In other words, he went outside of his index to beat his index. To my way of thinking, that’s cheating. Brazilian investments are riskier than German ones.

But not everyone cheats. We do observe skill in other professions: lawyers, surgeons, baseball players. It’s not a stretch to think that professional investors show skill as well. And since investors work in a numbers-filled line of work, finding a quantitative way to test for skill ought to be possible.

Only it’s not so easy. While return is simple to measure, risk isn’t. Is it variance? Loss? The likelihood of your company’s CEO testifying before Congress? However it’s stated, risk-adjusted return is the proper yardstick for measuring skill. And top managers have it. Investors just need to ask.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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By | 2014-09-05T19:32:27+00:00 June 24th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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