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Friday, November 16, 2007

Concentrated money managers beat everyone else

Money managers who concentrate on a few well-researched ideas beat indexers and money managers who are closet indexers (those who mirror the index closely and try to tilt their portfolios in one direction or another).

Although I've long known this, it was nice to see this confirmed in a recent academic article.

The authors of the article created a unique measure for finding out how actively a money manager differs from an index.

Their research results indicated that money managers who differed significantly from an index in their holdings had a significantly higher chance of out-performing the index.

This may seem obvious to you, but many managers try to avoid risk by hugging an index. Such managers do this because they lack the skill to pick the best companies to invest in. Unfortunately, these managers still charge active management fees. Not surprisingly, their lack of conviction leads their investor to under-perform the index after fees.

This just goes to show what I always tell people: you should either index to match the market at minimum fees or find an investor who can beat the market after fees. Such managers are rare, but, if they can out-perform an index over the long term, they not only pay their fees, but lead their clients to reach significantly higher levels of wealth.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

1 comment:

CresceNet said...
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