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Thursday, December 3, 2009

In Case You Still Thought You (or your broker,advisor, morningstar or magazine) Can Successfully Pick Actively Managed Funds That Outperform the Mkt

WSJ today

Top Mutual Funds: Just Luck or Skill?
Study Questions 'Active' Managers

It's impossible to tell whether actively managed funds that beat the market do so out of luck or skill, according to a new study by the professors who've championed index investing.

The claim means that investors can't know for sure how good their active manager is, say the professors, Eugene Fama and Kenneth French.

"People don't understand the effects of chance [on returns]," said Mr. Fama.... (Find a copy of the report at the Social Science Research Network.)

The fact that some funds in the professors' study beat the simulations does suggest that by picking the right funds investors can consistently outperform the market. But there's just one problem, according to the professors: The "good funds are indistinguishable from the lucky bad funds that land in the top percentiles."

That leaves picking the right fund a matter of guesswork. So even if investors stick with the top performers, they're running a risk because the manager's good results could be based on luck.

The presence of both good funds and lucky bad funds means it's likely that investors focused on top performers will end up with returns close to the market.

In an interview, Mr. Fama cautioned that this doesn't mean all index funds are viable options—there are index funds that charge high fees, for example. Investors should stick to low-cost and efficiently managed index funds, he said, naming Vanguard Group's offerings as among the best

kudos to Prof Fama for mentioning Vanguard and not Dimensional Fund Advisors the firm he is affiliated with (or maybe the reporter left that mention out of the article.

the full Fama - French paper is here

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