2016 is a year for active management. No, seriously

Posted by Robin Powell on January 15, 2016

2016 is a year for active management. No, seriously

 

Every year they say it, and almost every year they’re wrong: “2013/14/15/16 (delete as appropriate) is the year to back actively managed funds”.

Last January, we were told, conditions were perfect for active managers to use their skill and expertise to outperform their benchmark indices. What happened? OK, they didn’t do quite as disastrously as in 2014 — the worst year for active funds in living memory — but their net performance was still pretty shocking.

Again the papers are trotting out this tired old “story”. And not just the trade journals — you’d expect them to toe the industry line — but respectable newspapers too. Almost invariably the article is built on the opinions of a single active fund manager or fund shop spokesman, with no attempt made to seek an alternative view.

What do these journalists seriously expect active managers to say? “Once again, as a group, we’ve performed atrociously, and frankly you’re better off indexing”?

Of course, this may be the year that active managers do put an end to the dismal run they’ve been on since the financial crisis. By the law of averages, passive funds cannot continue trouncing active funds year after year indefinitely. But that really isn’t the point.

The research shows time and again that, over the long term, only around 1% of actively managed funds succeed in beating the market after costs, and even those are all but impossible to spot in advance. Think about that: 1%. That’s even fewer than you would expect from random chance. And even if active funds, as a whole, do have a better year in 2016 — they can hardly fare much worse — the overwhelming likelihood is that it won’t be long before normal service resumes and passively managed funds regain the upper hand.

People save for retirement over a period of several decades. Your chances of picking a fund that will still be around 30 years from now, let alone one that will outperform over that length of time, are tiny. Nor does it matter that the fund you’ve chosen bucked the trend by beating the index in 2014. New research by S&P shows that, out of 252 large-cap US equity funds, just three managed to stay in the top quartile for the whole of the three-year period ending in September 2015.

The lesson, once again, is that when it comes to trading and investing, forecasters are often conflicted and their predictions best ignored. One forecast I will make, though, is that whatever happens in 2016, there’ll be plenty pf people saying, 12 months from now, that 2017 really is the year for active management.

 

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.

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