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Active Managers Under Perform

A significant part of our investment philosophy lies in the reality that active managers do not out-perform the average market return. Research overwhelmingly shows that:

  • Active investment managers do not consistently outperform the index. In fact the majority of active managers often under-perform the index managers over time.
  • Attempting to select fund managers that will produce above average returns in future has little scientific or academic basis, as such it is at best unreliable.
  • Index funds, with low management fees and low turnover costs, always rank high in long-term performance studies.
  • Managers with good past track records are no more likely to have good track records in the future than are managers with poor returns - in fact, research shows that managers with good track records are more likely to have poor future returns than are other funds in the future.

Based on our own experiences, we acknowledge that:

  • Active managers are more expensive than passive managers - this is reflected in higher Management Expense Ratios (MERs) of actively managed funds.
  • There are many cases of an apparent disregard for ‘after-tax' returns for the investors in actively managed investment funds. Many managers pursue pre-tax returns that involve a higher level of turnover and subsequent realization of taxable capital gains.

Therefore we have included this page to show this reality in action.

10th December 2008 - Lessons from the Brisbane Lions - Scott's Financial Happenings Blog

The Brisbane Lions (Australian Football League club) have provided a useful case study of how an active management approach coupled with a lack of diversification leads to an unsuccessful investment outcome.

3rd September 2008 - Losing your money for a fee - Eureka Report article

Performance data shows that managed funds failed to protect investors from the market downturn.  Full article

4th August 2008 - A popular way to lose money - Eureka Report article

With a portfolio similar to the index, but higher fees than index funds, Colonial First State Imputation Fund stumbles on its promise to make money for investors. Full article

5th November 2007 - Shot in the dark - Eureka Report Article

Stockbroker recommendations are proving to be a hard sell, with a high percentage of research failing to deliver the returns promised to investors.  Full Article


28th September 2007 - Why L-I-Cs can be D-U-Ds - Eureka Report Article

Buying a share of a listed investment company offers "instant diversification". That's where the advantage ends. Unfortunately despite the skill, experience, low fees, low markeintg costs enjoyed by LICs our survey found most LICs dissappoint most of the time - that is they do not achieve the basic ambition of 'beating the market'. Moreover, the best known and biggest funds are even less likely to outperform - only the funds highlighted in yellow have actually outperformed the ASX 300 accumulation index.

nHow the LICs performed *
Returns to end of June, 2007
Size ($m)
12-mth return
5 Year Av Anual Return
ASX300 Index Return (accumulation)
Aberdeen (ALR)
Amcil (AMH)
Argo Investments (ARG)
Australian Foundation (AFI)
Aust. United Investments (AUI)
Carlton Investments (CIN)
Choiseul Investments (CHO)
Diversified United Investments (DUI)
Djerriwarrh Investments (DJW)
Huntley Investment Company (HIC)
Hyperion Flagship Investments(HIP)
Milton Corporation (MLT)
Sylvastate (SYL)
WAM Capital (WAM)
Whitefield (WHF)
Average Out/Underperformance
- 5.22%
- 1.58%
Size Weighted Out/Underperformance
* Outperformance of the ASX300 Accumulation Index is marked in yellow

Click here to view the full article.


29th August 2007 - Big-name funds disappoint - Eureka Report Article

Over one year, investors paid fund managers handsomely to underperform the index. Full Article


28th June 2007 - Million Dollar Waitress Beats the Experts

Jim Parker, the Regional Director of Dimensional Funds Advisors Australia, posts a regular commentary on the DFA website.  The latest edition highlights the success of an American waitress, Mary Sue Williams, in a stock picking competition run by CNBC.  She is in line to win the million dollar first prize ahead of 375,000 contestants.  She has never bought or sold a real stock in her life.  The secret of her success: "Part of it was luck ... a lot of it was gut feeling, some eenie-meenie-minie-moe, and common sense."  Mary has beaten thousands of financial professionals who have the benefit of high quality university degrees and complex software.


This is more anecdotal evidence that successful stock picking is more about chance rather than experience or expertise.  This is part of the story behind the thinking that we use in building our investment portfolios, also based on academic research, that suggests you can not regularly beat the market and it is better to hold an index style approach to investing.  For more details on this philosophy take a look at our webpage - Building Portfolios.


For more details of Mary's story take a look at the BusinessWeek article.


Good on ya Mary.




Scott Keefer



18th May 2007 - Funds' Careful Deception - Eureka Report Article

When a fund boasts it has outperformed the index, investors should be asking: which index? Full Article


30th April 2007 - Sydney Morning Herald, 'Brickbats for Active Managers'   

This weekend's Sydney Morning Herald, in the 'Investing' section has a column entitled 'Monitor' by John Collett. 

It quotes a Standard and Poors report from the US, that says most share fund managers fail to outperform the index. 

The stat's are pretty impressive, and about what we would expect.  72% of large company funds fail to outperform the index over 5 years and 78% of small company funds fail to outperform the relevant index over the same timeframe.

The report shows similar results for global sharemarket investing.

This is what we would expect - the high costs of 'normal' managed funds means that it is very hard for them to outperform. 


Scott Francis


12th February 2007 - Funds' Disappearing Act - Eureka Report Article

Fund managers tend to trail the index by about 2%. The picture would be worse but for their practice of closing down the poorest performers. Full Article


8th October 2006 - And the Winner is: The Market!   

The Sun-Herald runs a four week competition that they call 'The Shares Race'.  Eight tipsters choose a 10 stock, $100,000 portfolio and sees how that portfolio performs over the four week period of the competition.  Aside from the absurdity of a 4 week timeframe for a share investment, the results are interesting to look at  - and to see if we can draw any conclusions.

The average portfolio was valued at $101,585 at the end of the four weeks.  During the same time the ASX200 total return index had increased in value by 4.1% - meaning that $100,000 invested in the index over this period would now be worth $104,107.  The market easily outperformed the far less diversified portfolios.

Another interesting fact is to look at those people who should have had 'skill' in the game - the two last place getters in Richard Pritchard, described in the article as a 'Chartist' and Angus Geddes from Fat Prophets - a share investment reseach company.  Richard's portfolio was worth $92,254 by the end of the 4 weeks, and Angus' $98,463.  This suggests to me that there is little reward for skill in the market - these guys got hammered by an astrologer ($102,304 and more than $10,000 ahead of the chartist) and the dartboard with $98,636.

While I don't think we should read too much into a 4 week game, it is interesting to see how well the 'market' performed against some of the best and brightest in the financial services industry, and to see how poorly the 'skillful' participants faired.


4th October 2006 - Trade Tolls - Eureka Report Article

Investors are being short changed by fund managers with high portfolio turnovers. By minimising portfolio turnover you significantly reduce the capital gains tax payable on your investments. Full article


26th September 2006 - Super Investment Returns - NOT!   

The headline in the Courier Mail today read 'Super Run for Funds in August'.

The article then went on to espouse the great returns for super funds including:

  • Australian share funds an average return of 17.9% for the year to 31st August 2006
  • International share funds an average return of 13.1% for the year to 31st August 2006
  • Listed property trust funds an average return of 15.8% for the year to 31st of August 2006

What great results for investors!  Or are they?

Have a look at these figures relating to the overall performance of the market during these times.

  • The ASX300 share fund had a return of 19.59% for the year to 31st August 2006
  • International share index had a return of 14.5% (50% hedged) for the year to 31st August 2006
  • Listed property trust funds index (ASX300) had a return of 20.94% for the year to 31st of August 2006

    In each case the average super fund SIGNIFICANTLY underperformed the simple index return.

    These results even surprised me.  Over a 1 year period I would have expected that funds got closer to the index than that.  What the results clearly show is just how tough it is to beat the market over a short time period - and over longer time periods the index will win by more and more.  It also shows that we should not be complacent even when investment returns are booming.  While the absolute returns of the super funds are fine, underperforming the index by a margin is not acceptable, because the option is always there for investors to use an index fund.

    The performance data for the superannuation funds was taken from the superratings website.

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    25th August 2006 - The Secrets of a High Performance Investment Portfolio - or not!

    An interesting piece of research was presented on today's ABC lunchtime news show.  Dr Karl was talking about some recent research that showed that companies that listed on the stock exchange performed better if they had a simple and easy to remember name.  It was presented as light hearted research, however it provides a reminder as to some of the folly of 'active management', that is spending time and money to try and identify which companies are going to perform better than any other.

    It reminds me of some research that said companies that start with the letter 'W' had outperformed over a period.  In fact, I would think that over the last 10 years this might still hold true - there are not that many companies that start with the letter W the biggest such as Woolworths (25.7% a year average for last 10 years), Wesfamers (23.2% a year average for last 10 years), Westfield (had a merger about 3 years ago so there are no combined results), Westpac (19% a year average for last 10 years) and Woodside (23.1% a year average for last 10 years) are all strong performers over this time.  All these companies beat the average sharemarket return be some margin.

    So the moral of the story is that we should invest in shares that start with 'W' or have easy to remember names.  Or, for a lay down winner, easy to remember shares that start with the letter W.  No rational person would be, or should be, comfortable with either of these strategies as a basis for a long term investment strategy.  Therein lies the problem with 'active management', trying to pick and choose which shares are going to outperform.  There is so much information already priced into each share that it is really difficult to pick any that will outperform.  And, when patterns or outperformance are identified, who says that it is just not luck driving the higher returns - such as the letter 'W'. 

    At the end of the day the market does a good job of rewarding long term investors who focus on a long term, well diversified, buy and hold approach to investment.


    2nd August 2006 - How the mighty have......underperformed   

    My latest Eureka report article considered the big issue of how well have the biggest fund managers performed over the past 5 years?  I looked at only Australian share fund and found that, on average, the Australian share funds of companies like Macquarie, BT, Colonial and AMP had failed to beat the average market return.  In fact, they failed to the tune of 1.7% a year.

    This is an interesting warning.  If the biggest and best financial services industry can't beat the index return through 'active management', then who can?

    Another interesting aspect of the article is that an index fund, which simply matches the average return with little buying and selling of investments, was very tax effective.  The Vanguard Australian share fund had a pre tax return over the 5 years to the 30th of June of 11.6%, beating the vast majority of the active funds, and an excellent after tax return of 11.33% for someone in the 30% tax bracket.  The active funds, which by their very nature will be trading a lot, would have lost much more than this in tax.


    26th April 2006 - Behind Closed Doors - Eureka Report Article

    Many actively managed funds are all too often 'hugging the index' and actively managing only a small portion of capital in order to protect their returns. Compare the investments of your managed fund against the index carefully to avoid paying for a service you aren't receiving. Full Article