Hi Guys,
In contrast to the main theme of the referenced article, I do not find that the active investment world has been turned topsy-turvy. The active fund management performance this year is just a slight outlier from its normal dismal record. It is part of the nominal statistical data scatter.
The historical data suggests that active fund managers outdistance their passive equivalent benchmarks only about 30% of the time on an average annual basis. This year, that statistic will likely degrade to a mere
15%. That’s mostly noise and not a seismic shift in the tide.
The 20
14 performance of active fund managers is yet another data point that buttresses the wisdom of passive Index investing. Managers who believe they can project primary asset class yearly incremental return changes or, on a finer level, return distributions as a function of sector classification, are chasing a shadow.
By overweighting their forecasts, active managers add to the standard risk of broad market return variations. This is doubling-down in the risk dimension. It is unnecessary.
The evidence that strongly suggests that this is an unfathomable forecasting task is embedded within the historical data sets themselves. It is contained in the various Periodic Table of market Returns. Here is a Link to the famous Callan Periodic Table:
https://www.callan.com/research/files/757.pdfHere is a Link to the slightly less famous MSCI Sector performance Periodic Table:
http://www.msci.com/resources/factsheets/MSCI_USA_Sector_Indices_Returns_and_Volatilities.pdfThe obvious, outstanding takeaway from these presentations is the completely random character of the annual returns. Predicting these annual position changes with any accuracy is simply not possible.
The commitment that active management makes to their dubious projections explains a significant fraction of their performance challenges. Management and trading costs add to those challenges.
So, I take issue with the articles title “20
14: The Year that Nothing Worked”. Some things have worked quite well. Overall, the markets are returning rather normal rewards in various pieces.
Active market investment wisdom seems ephemeral. Those few who enjoy some annual success seem to be one-trick ponies. It is tough to repeat superior excess returns. This too has a firm statistical basis. Market heroes over time are a very rare breed. The unpredictable nature exhibited by all sorts of Periodic Investment Tables illustrate why this is so.
These data support the need for broad market diversification. These data document the folly of active fund management once again, however, this time with an exclamation point for emphasis.
Best Wishes for the coming New Year and beyond.
