Why do active managers struggle to replicate past success?

In evaluating fund performance, it's extremely hard to distinguish genuine, repeatable skill from random chance. Investors are constantly shown examples of funds whose managers appear to have demonstrated superior expertise. But we forget one very important thing: at any one time, there are so many funds to choose from that there will almost certainly be some active managers who appear to have exhibited skill.   

Most sports fans can think of a coach who succeeded with one team but then flopped with another. Managing an active investment fund is not dissimilar to managing a sports team. No matter how well-known you are, the fact that you've succeeded in the past is no guarantee you'll do so in future.

In his book Index Funds: The 12-Step Recovery Program for Active Investors, Mark Hebner uses the analogy of movie sequels. "Men in Black II, Ocean's Twelve and The Hangover, Part II," he writes. "All of these movies have one thing in common: they were abysmal sequels to blockbuster movies. We long to regenerate scenarios when everything comes together perfectly and the stars align, but that kind of success is rarely duplicated. "As hard as it is to (do) in the film world, it is even more difficult for these all-star money managers to duplicate their past success."

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