OK readers. We’ve been together for six months now and if any of you still have your money in an active fund — you know, where you actually let portfolio managers choose things all on their own — I haven’t done my job.
There is no excuse for it. Actually, there’s one. If your manager says: “I am privy to inside information and am willing to go to jail to make you rich,” then of course you pretend not to hear and stay invested.
Otherwise, let’s remind ourselves of active management’s diabolical record. My favourite place to start is the annual persistence scorecard by S&P Dow Jones Indices. It not only dismisses stock pickers, but also the industry of ranking them.
The latest report for 2022 came out last month. As usual, it showed that the majority of US large-cap managers trailed the S&P 500, this despite an unusually wide spread of returns between sectors and between stocks, which should have made it easier to outperform.
Plenty of managers beat the index, sure. But was it skill or luck? If the former, you would expect persistent outperformance. The good ones would keep winning year after year. Alas, this was not the case. It never is.
Take whatever period or category you wish. For example, of the managers in the top quartile two years ago, none was in the top quartile for the next two years. Even of those in the top half in 2020, only 5 per cent could stay there.
How about small-caps? Those guys always boast of the chief executives on speed dial or how many company visits they do. Again, only a third of them were among the top 50 per cent of managers in the past five years having achieved it in the previous five.
This lack of persistence is across regions and asset classes. I remember as a consultant reaching the same conclusion for an asset management client who was buying a rival. Don’t overpay for the hot funds, we advised — they will soon fade.
Yet how many of us are sold products based on quartile performance? The whole ranking system is nonsense. Worse, it is usually the case that a majority of funds on offer are trailing their benchmarks anyway.
For example, looking at global equity managers for the past 10 years (long after I was one, ahem), only 380 of them out of the 1,000 monitored by Refinitiv Lipper beat their respective indices in any year on average.
And exactly like asking a 1,000-person crowd to flip a coin and for everyone who gets heads each time to sit down, guess the number of managers who outperformed in every year for the past decade? Just one. It was random, in other words.
Even over rolling five-year periods, a timeframe one would think allows for style biases and mistakes to be rectified, only 260 managers could outperform their benchmarks on average. Over the whole ten years barely 200 could.
Spookily, almost exactly the same proportion of the 331 global bond managers also tracked by Refinitiv Lipper beat their indices over five and 10 years.
Hopeless, the lot of them. And good luck picking the winners in advance. Especially as your adviser would have pushed you into a top-quartile fund — the exact opposite of what you should have done.
Remember also these numbers flatter due to survivorship bias. They only include funds that were launched since 2013 and still active on April 23 this year. Hundreds of truly dreadful funds would have vanished over the period — mostly due to poor performance.
No wonder index products continue to gobble active ones for breakfast. After growing at 15 per cent annually for more than a decade — three times faster than traditional funds — ETF assets in Europe and America reached $7tn at the end of last year.
But active management isn’t only about individual shares and bonds. All investing requires choice. I’m being illogical, therefore — if not a complete hypocrite. How come I spurn everything but index funds but happily make my own allocation decisions between asset classes and regions?
It’s impossible to defend, frankly. But at least I am reinforcing the case against active management with my returns. Only a few weeks ago my portfolio was worth £460,000. Now it’s back to £449,000 — just 1 per cent above where it was when I wrote my second column in November.
No, it doesn’t make me feel any better that the average hedge fund is also flat over the past 12 months, according to Preqin data. Nor that all the faffing I had to do to move my pensions into a self-invested personal pension (Sipp) kept me in cash too long.
In fairness, the portfolio is mostly performing how I expected it to. Since the end of March I’ve made an enjoyable 7 per cent gain from the European bank punt and my new S&P 500 fund is up 5 per cent over the same period.
Meanwhile, it’s always nice to front-run Warren Buffett. Trouble is I’ve owned Japanese equities for so long that the 20 per cent rally since December merely feels owed to me. I was also pleased with my contrarian punt on UK stocks until recently. Now the FTSE 100 has popped into the red again for the year.
As for the Treasury and inflation-protected bond funds, sure, they are both down since I bought them two months ago. But they are doing their job. The former moves in the opposite direction to my US shares and the latter provides a hedge in case inflation goes mental.
As for those bloody Asian stocks — the bane of my life — that’s our topic for next time.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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