Lisa Gray has been a wealth writer since 2001. She has been involved in the wealth management industry since 1988. She is the author of two bestselling books—The New Family Office and Generational Wealth Management.| Paper By Two Academics Examines Both Luck And Skill In Active Management |
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| Tuesday, July 03, 2012 16:07 |
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Is mutual fund portfolio performance a matter of skill? Or is it just the luck of the draw. A recent academic treatise says that data collected from 289 managers actively managing 355 funds for more than 10 years indicates it may be a combination.
Even for managers who develop a strategy that enables their funds to beat the market, the key is to recognize when those strategies are no longer viable. Markets continually evolve. That’s evident from the ever-evolving nature of economies those markets represent.
This Website Is For Financial Professionals OnlyProponents of the efficient market theory have no problem dismissing manager skill. But managers such as Peter Lynch of the once-famed Fidelity Magellan Fund seem to have be able to develop skills that exploit opportunities created by market trends.
The failure to acknowledge shifts in trends or to admit that what was once a highly successful strategy simply has lost its effectiveness because market conditions have changed limits the skills of such managers to a time horizon.
Even if it is just luck, that winning streak can last—again, as in Peter Lynch’s case—for some time. The study yielded some interesting conclusions that you can find here. The study also makes another useful point: the measure of active managers’ success is usually performance with little consideration of the risks taken to achieve that performance or how well a fund’s strategy is aligned with a client’s goals.
Another important point is that fund flows do not necessarily line up with continued stellar returns. All we have to do is to look at mean reversion to understand that truism.
Nevertheless, getting into the nuts and bolts of what makes a fund manager successful can better equip us in recommending investment strategies that may be appropriate for clients.
Comments (1)...
This is the classic question Lisa: skill or luck? I recently attended a consultants conference where this was discussed, and Bill Miller was the case in point. After lengthy debate, one conference attendee declared "I know Bill Miller. He is skillful. Skill is not infallible." My conclusion from this experience is that skill is familiarity and evidence, in that order. Academics can crunch numbers all day long. I personally would not waste the time & energy reading their results.
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July 04, 2012
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