finally, good statistics: have any mutual fund managers beaten the market?

July 14, 2008

We’ve all heard it a number of places over the years, I imagine: actively-managed funds basically never beat the market anymore. But a study published about a year ago finally sounds like it used the right statistics to answer the question. It’s covered in this NYT article: The Prescient Are Few.

Here are some excerpts, if you’d rather not click through.

The method:

The statistical test featured in the study is known as the “False Discovery Rate,” and is used in fields as diverse as computational biology and astronomy. In effect, the method is designed to simultaneously avoid false positives and false negatives — in other words, conclusions that something is statistically significant when it is entirely random, and the reverse.

The result:

… when analyzing their entire fund sample, with records through 2006, this proportion was just 0.6 percent — statistically indistinguishable from zero, according to the researchers.

Some likely explanations:

WHY the decline? Professor Wermers says he and his co-authors suspect various causes. One is high fees and expenses. The researchers’ tests found that, on a pre-expense basis, 9.6 percent of mutual fund managers in 2006 showed genuine market-beating ability — far higher than the 0.6 percent after expenses were taken into account. This suggests that one in 10 managers may still have market-beating ability. It’s just that they can’t come out ahead after all their funds’ fees and expenses are paid.

Another possible factor is that many skilled managers have gone to the hedge fund world. Yet a third potential reason is that the market has become more efficient, so it’s harder to identify undervalued or overvalued stocks.

A friendly reminder:

Whatever the causes, the investment implications of the study are the same: buy and hold an index fund benchmarked to the broad stock market.

[thanks to umair haque for including this in 'Essential Reading']

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gregorylent 4 months ago 1 point
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there are truths so hidden as to be talked about only in mystical circles, one is that we aren't nearly as in control of our lives as our egos like to think. articles like this are simply pointers to the underlying reality. cause and effect are often not what they seem. successful people like to think they are successful because of some reason, but often it is simply luck or fate or karma or the flow of the times ...

i expect a lot more growth in this kind of understanding, and a lot of it is going to come from the advertising world, simply because effectiveness is proving to be a very difficult measurement problem. there really is little to measure! there are other forces at work.

and since you like umair, he is talking towards some of this. that energy follows intention, the good vs. evil meme, are not quantifiable, they are qualitative. the realm of quality is the realm of the subject(ive).... and this is not the ego we think is so important.

look for subtlety to increase, and a huge necessity for creating more refined measuring tools. we almost are going to need to be inside 6 billion minds, seeing through 6 billion sets of eyes and concepts.

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