Can you really Compete with Active Fund Managers?

Is it arrogant to think that a lone individual can outsmart and outperform an active fund management firm that has many times the resources and capital? It would certainly appear so.

Your fund manager is probably smarter than you, has more money than you, and has a team of analysts and PhD’s working for him/her.

Do you really think you have a chance?

The Active Fund Managers Secret

There is an embarrassing little statistic that most active fund managers (active means the managers who aim to beat the market) would rather the public not know about.

Historically, the majority of active managed funds have failed to even equal, let alone “beat” their benchmark indices.

Standard & Poor’s Index Versus Active Funds Scorecard (SPIVA) released in Mid-Year 2009 again shows that The S&P/ASX 200 index has outperformed two-thirds of active Australian general equity funds over the last 5 years.

Here’s the Bad News…

So we have a problem. If these very clever and hugely resourced people can’t beat the market, what chance do you and I have?

This tells us that either fund managers are not as clever as we think, or outperforming the Index is harder than we think? I would go with the latter, as on the whole, the fund management game attracts significant talent.

Size Does Matter (the Smaller the Better!)

The good news is that HomeTrader believe that as individuals we have some distinct advantages over large funds which make it significantly easier for us to produce outperformance.

The problem is that the more money you have to invest the harder it becomes to produce outperformance. Think about it, if a strategy can be used with tens or hundreds of millions of dollars then funds will use the strategy and the ‘edge’ will disappear. All that competition at the big end of town makes it very tough for the large capital pools.

To produce outperformance with big money requires exponentially more cleverness. This is not to say you don’t need to be clever even to produce outperformance with smaller amounts of money, you do, but not to the same extent.

Where to From Here?

So what should you do with your money? You can:

  • Recruit active managers. Entrust your money to a fund manager and cross your fingers that you picked the right one. Don’t forget that past results have no significant bearing on future results, so don’t look to track record for help.
  • Give up on outperformance. Invest in index funds and get market returns. Australian equities produced an average return of about 11.6% over the past 20 years.
  • Get clever. Provided you have a sizable pot to invest, you might not have to be as clever as you think to outperform the market.

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