Professor Mark Perry at the University of Michigan cites the following study to prove that active management is a loser’s game:
CBS Money Watch: “Twice each year, Standard & Poor’s puts out its active versus passive investor scorecard, reporting on how actively managed funds have done against their respective benchmark indexes. Every time, the results are pretty much the same, demonstrating that active management is a loser’s game — in aggregate those playing leave on the table tens of billions of dollars forever seeking alpha (outperformance, adjusted for risk).”
The following is a summary of the latest scorecard’s findings:
- For the five years ending March 2012, only 5.23% of large-cap funds, 5.46% of mid-cap funds and 5.14% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.
- Looking at longer-term performance, 5.97% of large-cap funds with a top-quartile ranking over the five years ending March 2007 maintained a top-quartile ranking over the next five years. Only 4.35% of mid-cap funds and 15.56% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would suggest a repeat rate of 25%.
Obviously, the majority of investors in active funds are taking all the risks of investing and not being properly rewarded for taking those risks, transferring tens of billions from their accounts to the wallets of active managers. The question is why do they keep doing this? Evidence suggests that one explanation is that they are simply unaware of how poorly they are doing.”
According to Professor Perry, active management is only a success if it outperforms in each 12-month period. I know of a number of return factors that have outperformed over time, but I know of nothing that outperforms in every single period.
In related news, Michael Jordan is now considered to be a loser because he did not win the NBA championship in every year he played.