Glancing through the financial media this morning I came across a very interesting article on the Wall Street Journal website - The Stock Picker's Defeat. The article looks at the terrible year for the Legg Mason Value Trust in the USA. The fund manager is William H. Miller who is dubbed in the article as the era's greatest mutual fund manager. This has been bestowed on him because every year from 1991 to 2005, his value trust outperformed the broad S&P 500 Index in the USA.
Unfortunately 2008 has been a devastating year for the trust and its investors. According to Morningstar, investors have lost 58% of their money over the past year, 20 percentage points worse than the declines of the S&P 500 Index. Some might think that this is not so bad given the outperformance over 15 years up to 2005. Unfortunately that outperformance has now been wiped away. A graph included with the article clearly depicts this and Morningstar now has the fund amongst the worst performing in its class for the last one, three, five and ten year periods.
This is another example of the dangers of an active manager style approach to investing. Fund managers do have periods of outperformance. This may be through some skill on the part of the manager or more likely just the function of probability and chance.
Even if there is such a thing as skill on the part of fund managers, another problem faced by investors is the ability to find such a manager that is going to out perform in the long run going forward. This article suggests that investors who have come to the Legg Mason Value Trust party later in the course of events most likely have under performed the index return.
This index return, over the long run, is what we refer to as the return investors deserve to be getting from investing in the share market. Putting it at risk by following an active style manager is a risk we believe is not rewarded over the long term.
On our website we have developed pages and a downloadable document which outlines our Research Based Approach to investing. One section of that material includes research that has been conducted which finds no evidence that choosing a managed fund that had outperformed in the past would provide above average returns into the future.
If you are interested in finding out more about our approach and the research which underpins it please take a look at our Building Portfolios and Research Based Approach pages of our website.