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November 10, 2014

Fewer active managers beat market than at any time in this decade

Should investors choose actively managed funds as their core investments or rather use low-cost index trackers (ETF)? Pretty much every year the result is the same: only a minority of actively managed funds beats their benchmark. Year-to-date (end of October), actively managed US equity funds have delivered their worst relative performance in a decade: only 18% managed to outperform the stock market. According to Bank of America, since 2003 there was only one year (2007) when a majority of actively managed funds beat the market.(1)

No worries, you might conclude, I will just go with the best funds. Most investors pick the funds based on the past 1-3 year performance. This seems to inject some objectivity into the process… but the reality shows that past is no prologue. A study by S&P (2) has tried to analyse if past performance matters, i.e. if there is any persistency in the performance. Sadly not. Out of nearly 3000 funds, only 0.07% (i.e. 2 funds) managed to consistently stay in the top 25% over the last 5 years. The result isn’t so surprising if you assume that the performance of active fund managers is in fact random because if you assume random distribution the math gives you pretty much the same result: 3000 x 25% x 25% x 25% x 25% x 25% = 3

If you would like to know how we can help you to optimize your portfolio, please contact us at info@ipanema-capital.com

(1) http://on.ft.com/1zcDXqh
(2) http://www.nytimes.com/2014/07/20/your-money/who-routinely-trounces-the-stock-market-try-2-out-of-2862-funds.html

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