Financial Happenings Blog
Friday, December 31 2010
One method of analysing the success or otherwise of an active fund manager is to look at their past performance history. You would think that if a fund manager has done well in the past it will continue to do so going forward. Unfortunately the evidence of persistent out-performance is very weak and can be explained by the laws of probability as luck rather than skill.
A famous example of when strong historical performance has not turned out well for investors is the Legg Mason Capital Management Value Trust. For 15 years in a row to the end of 2005 the trust, managed by Bill Miller, out-performed the S&P 500 index in the US. (Fund Manager Beats S&P for 15th year in a row ) You would think with this kind of track record your money would be well invested in this trust. Unfortunately the last few years have not panned out so well. In 2010, up to the 22nd of December the trust returned 7.08% compared to the S&P return of 15.14%. This result put the fund in the worst 10% of its category (Large-blend) for the 4th year out of the past 5. For the past 15 years, taking in 10 of those 15 consecutive years of out-performance to 2005, the fund has provided a 0.27% premium over the S&P 500 with a great deal more volatility. (Down in the dumps again)
You can do the maths on this, if you had of invested in the fund later into its record run, the index would be beating you. If you had started invested in late 2005 you would be well behind.
This example provides anecdotal evidence of when following historical performance does not work. We believe this is just more evidence to show the benefit of steering clear of the active fund manager / stock picker approach and rather focus on building a portfolio targeting particular asset classes in a low cost way according to fundamentals developed through scientific research.
Regards,
Scott Keefer
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