Lucky or Good? (Part 2)

Are mutual fund managers just lucky? Or really good?

A recent study by an index fund company found–surprise–that index funds outperform actively managed funds. Ken French and Eugene Fama looked at the aggregate performance of all actively managed mutual funds and compared it with the market, both before and after fees.

They found that before fees the active funds did add a little value. But their fees sucked all that up, and then some. In the aggregate, actively managed funds after fees underperformed a capitalization-weighted index of the entire market.

Well knock me over with a feather. Fama and French have just proven that 3 – 1 = 2. If you aggregate the entire mutual fund universe, you pretty much get the market. And if you compare it with the market, you get an identity. Now, if you subtract fees, you’ll get sub-market performance. Q.E.D.

This says nothing about whether certain managers can add value over time. It says nothing about whether someone was skillful or just lucky. It says nothing about whether beaten down stocks can return to favor, or whether high-flyers should come back to earth. All it says is A = A.

Fama and French have often been called the founding thinkers behind Efficient Markets, and much of their writing shows that outperformance is very, very hard. But this work only proves that when you look at research, be sure to note who paid for the research.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-05T14:29:24+00:00 December 1st, 2009|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. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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