Our Insights

About personal finance, investments and markets.
April 15, 2016

Would you invest in a strategy that has a less than 20% chance of success?

Asked that way, no rational investor would pick a strategy with such a low probability of success. Playing roulette at a casino already gives you a better chance – and nobody would confound a casino with investing. But the reality looks different: most investors still put their money in actively managed funds despite every long-term study showing that your chances of beating an index are less than 20%. Even today, more than two thirds of all money in Europe is still invested in actively managed funds.

Passiv Marktanteil2

Europe – nuls points for active managers

Since 2002, S&P Dow Jones Indices has published its S&P Indices versus Active (SPIVA) Europe Scorecard that compares the performance of actively managed funds to their index benchmark. With the most recent study, published at the end of March, S&P Dow Jones Indices provides for the first time 10 year data. The key take-aways are:

  • The longer the time period, the lower the odds that active fund managers beat the index. Generally we would disregard 1 or 3 year comparison data anyway as most investors have a much longer investment horizon and luck plays a big role over shorter time frames.
  • 86% of large cap European fund managers underperformed
  • 91% of small-, mid- and large cap Eurozone fund managers underperformend their respective benchmark
  • 97% of Emerging Markets fund managers underperformed
  • 98% of global fund managers underperformed.

Spiva Table

The data confirm how difficult it is for actively managed funds to outperform over longer time frames. Interestingly this is also true for supposedly inefficient asset-classes such as emerging markets, where just 3% beat their benchmark.

So you found that one lucky fund? Good luck holding onto it

Leaving the question aside whether the rare outperformer was due to luck or skill, we then run into the next set of problems if we decide to pick an active fund manager based on his past track record:

  • High manager turnover: European fund managers change their job on average every four years
  • High fund turnover: only approximately 50% of funds that existed 10 years ago are still in existence today. Fund survivorship is very poor. Closing underperforming funds or merging them with other funds to make their performance look better is an old trick that fund management companies have played on consumers for years.

Most people invest for their retirement and they measure their time frame not in years but in decades. The odds of your fund still being around in 20+ years AND having beaten the index are all but miniscule.

Summary

Undoubtedly the rewards for selecting a good active fund remain considerable. It is also a game that is possible to win. However, the odds make it so unlikely that it is prudent not to play. Does your portfolio contain many traditional actively managed funds? Maybe it is time to talk. We can show you how to set up a more successful portfolio based on modern standards.