Percentage of Truly Skilled Active Managers Not Very High

By Matthew Hougan

Let me get this straight: Without reading the research, Jim Wiandt dismisses the 0.6% figure as absurd?

That's a little too quick for me.  I didn't spend hours pouring over the research paper, but I did at least read it.

But ... umm ... OK ... I'll play along with your little "no data thought experiment."

First, though, let's be clear about the question we are trying to answer. We're not just asking "what percentage of active managers have some skill." We're asking, what percentage of active managers can:

• a) beat the market over the long-term out of stock-picking ability and not luck
• b) beat the market by a large enough margin to compensate for both expense ratios (averaging about 1% per year?) and internal trading costs (estimated by most observers to average around 1%)
• c) do it consistently over time, even as assets grow into the multi-billions?

There are currently about 8,000 mutual funds. 0.6% of 8,000 is 48 funds.  You're saying that there are more than 48 actively managed funds out there today that consistently deliver alpha?

And that those funds deliver enough alpha to more than make up for a 1%-3% annual all-inexpense ratio? 

And that those funds stay small and nimble enough that they can repeat those results again and again? 

And that there are more of those funds than would be accounted for by luck and random distribution?

I'm playing Devil's Advocate here to a point --- numbers are easy to massage. But I don't think the percentage of active managers delivering enough alpha to make up for their expense ratios is very high.

Comments

[bbzz24:]

and dont just average results when you look at the 'long-term'. look at cycles: a good manager can make money in bull & bear markets. perma-bear/perma-bulls have ample returns when in the groove and lose money when their models dont work. if someone's not smart enough to understand that the environment has shifted its mood and the game ain't the same, then that person lacks skill.

2008 Jul 16 05:54 AM