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Like stock and time
picking, manager picking is a worthless endeavor; however, there are still
investors out there who believe they can select an all-star manager or
financial guru who can beat the odds. To be sure, there is no shortage
of managers out there who are willing to try to beat the odds for their
clients or mutual fund shareholders—for a hefty fee. Like all speculators,
these managers do win occasionally, attracting lots of media attention
and new clients. Truth be told, the majority of expenses and fees in the
investment industry go toward money managers who gamble with other peoples’
money. Investors would be wise to pose the following questions to their
money managers:
1.
Do you have skill or were you just lucky?
2. Were you the beneficiary of the market’s random
walk or did you really know tomorrow’s news and how it would affect
the investments you picked for your clients?
3. Will there be persistence in your perform ance?
4. Is a three to five-year time period long enough
to judge your success?
5. Statisticians say we need 20 years of data to judge
success. Have you ever managed a mutual fund for 20 years or more or
do you know anyone who has?
So-called star money
managers attract about 75% of new mutual fund investors. This is despite
the fact that what are considered “today’s top 10 mutual funds”
often tank within three years.
Typically, investors first invest in a “star” fund run by
a “star” manager when they read about the “latest and
greatest funds.” Then they sell their investments within a few years
when they become disenchanted by the fund’s shoddy performance.
This trend supports the findings of the 2004 Dalbar study on investor
behavior, which shows that investors hold mutual funds for an average
of 4.2 years, buying at the highs and selling at the lows. This results
in the average investor greatly underperforming a market.
Manager picking has become so popular among investors that an entire industry
has sprung up to help identify future winners based on past performance.
Media advertisements feature winning mutual fund managers boasting of
their recent success. The performance histories of mutual funds regularly
appear in such publications as Barron’s, BusinessWeek, Fortune,
Money, and Consumer Reports. Even highly sophisticated consultants retained
by multi-billion dollar pension plans use recent fund performance as the
most important criterion in selecting “the best” money managers.
But, as Figure 5-1 clearly shows, that top performance
rarely repeats in following years. Only about 14% of the top 100 managers
from the one-year periods repeated their top 100 performance in the second
year. In 1999, only one of the top 100 managers made the list in 2000.
Figure
5-1 |
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"
There is one final problem in selecting a winning manager. According
to Richard
A. Brealey, "...you probably need at least 25 years
of fund performance to distinguish at the 95% significance level
whether a manager has above average competence." Another
commentator accepted the 25-year time frame, "but only
if the pension executive is using the perfect benchmark for
that manager. Using a less than perfect benchmark may increase
the observation time to 80 years." |
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p.
177 Bogle on Mutua | | |
