No such thing as an expert fund manager

If you’re paying a fund manager for his or her expertise, your money might be better spent elsewhere.

An interesting new study by Andriy Bodnaruk of the University of Notre Dame and Andrei Simonov at Michigan State University compared the portfolios of fund managers with those of wealthy and educated but non-specialist investors.

They concluded “Wealthy investors appear to be as good individual investors as professional asset managers.”

If you’re paying for active fund management, then this finding might come as a bit of a disappointment.

It is however consistent with the efficient market hypothesis, which says all information about investment assets is already factored into market prices. This makes the notion of expertise about future market movements something of a fallacy.

Active fund management has regularly come in for criticism in recent years, with those supporting a more passive approach to investing presenting evidence that their church delivers better long-term outcomes.

Certainly in the current economic environment, where returns from investments can be expected to be more modest, the cost of investing is a major factor in the net return available. Keeping costs lower by selecting index tracker funds is one way of guaranteeing better returns.

There is however a caveat in the research from Bodnaruk and Simonov.

They also looked at how the stocks owned personally by fund managers which were also held in their funds performed, and discovered these did out-perform individual investors.

One reason for this finding might be that managers feel compelled to manage risks in their funds, therefore diluting away out performance through too much diversification. In addition to their own ‘best ideas’, fund managers are often forced to hold other stocks in which they don’t have the same high level of confidence.

It’s for this reason that, if you select an actively managed fund, you should be considering a truly active fund; no closet trackers and nothing where the sheer volume of underlying stocks reduces the chance of returns as well as reducing risk.

We believe there is still a place for actively managed funds in portfolios, alongside index trackers and in particular markets. Do get in touch to find out more.

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