Okay readers. We’ve been together for six months now, and if any of you still have money in an active fund – you know, where you let portfolio managers pretty much do everything for themselves – then I haven’t done my job.
There’s no excuse for it. Actually there is one. If your manager says, “I have access to insider information and I’m willing to go to jail to make you rich,” then you naturally pretend not to hear and stay involved.
Otherwise, let’s recall the devilish track record of active management. My favorite place to start is the S&P Dow Jones Indices annual persistence scorecard. It not only relieves stock voters, but also the industry from ranking them.
The last report for 2022 was released last month. As usual, it showed that the majority of US large-cap managers supported the S&P 500, despite an unusually wide dispersion of returns between sectors and stocks, which should have made it easier to outperform.
Many managers beat the index, sure. But was it skill or luck? In the former case, you would expect continued outperformance. The good guys would go on winning year after year. Unfortunately this was not the case. It never is.
Take the desired period or category. For example, of the managers who were in the top quartile two years ago, none were in the top quartile for the next two years. Even of those in the top half in 2020, only 5 percent could stay there.
What about small caps? Those guys are always bragging about the chief executives on speed dial or how many company visits they do. Again, only a third of them have been in the top 50 percent of managers in the past five years having reached it in the previous five years.
This lack of persistence extends across regions and asset classes. I remember coming to the same conclusion as an advisor for an asset management client who bought into a rival. Don’t overpay for the hot funds, we advised – they will fade quickly.
But how many of us are sold products based on quartile performance? The whole ranking system is bullshit. Even worse, it is usually the case that a majority of the funds on offer lag their benchmarks anyway.
For example, looking at global equity managers from the past 10 years (long after I was one, ahem), only 380 out of 1,000 tracked by Refinitiv Lipper beat their respective indices on average in a year.
And just like asking a crowd of 1,000 to toss a coin and for everyone getting heads every time to sit down, guess how many managers have outperformed each year over the past decade? Just one. In other words, it was random.
Even over rolling five-year periods, a time frame where one would think it is possible to correct style deviations and mistakes, only 260 managers were able to outperform their benchmarks on average. Over the entire ten years, barely 200 could.
Scarily enough, almost exactly the same percentage of the 331 global bond managers also tracked by Refinitiv Lipper beat their indices over five and ten years.
Hopeless, many of them. And good luck picking the winners in advance. Especially since your advisor would have pushed you into a top quartile fund – the exact opposite of what you should have.
Also remember that these numbers are flatter due to survivor bias. They only include funds that have launched since 2013 and are still active as of April 23 of this year. Hundreds of really awful funds are said to have disappeared over the period, mainly due to poor performance.
No wonder index products continue to gobble up active products for breakfast. After growing more than 15 percent annually for more than a decade — three times faster than traditional funds — ETF assets in Europe and the Americas reached $7 trillion at the end of last year.
But active management is not just about individual stocks and bonds. All investing requires choice. I am therefore illogical – if not a complete hypocrite. Why is it that I reject everything except index funds, but like to make my own allocation decisions between asset classes and regions?
It’s frankly impossible to defend. But with my return I at least strengthen the case against active management. Just a few weeks ago my portfolio was worth £460,000. Now it’s back to £449,000 – just 1 per cent more than when I wrote my second column in November.
No, it doesn’t make me feel any better that the average hedge fund has also been flat for the past 12 months, according to data from Preqin. Nor that all the hassle I had to go through to convert my pensions into a self-invested personal pension (Sipp) kept me in cash for too long.
Frankly, the portfolio is performing largely as I expected. Since the end of March, I’ve had a nice 7 percent gain with the European bank, and my new S&P 500 fund is up 5 percent over the same period.
Meanwhile, it’s always nice to let Warren Buffett lead the way. The problem is that I’ve owned Japanese stocks for so long that the 20 percent rally since December can only be credited to me. I was also happy with my contrarian bet on UK stocks until recently. Now the FTSE 100 is in the red again this year.
As for the Treasury and inflation-protected bond funds, they’ve both fallen since I bought them two months ago. But they do their job. The former moves in the opposite direction to my US stocks and the latter provides a hedge in case inflation goes crazy.
As for those damned Asian stocks – the bane of my life – that’s our topic for next time.
The author is a former portfolio manager. E-mail: stuart.kirk@ft.com; Twitter: @stuartkirk__
