The Myth of the Successful Money Manager

The Myth Of The Successful Money Manager Many Americans believe that professional investors – many of whom are among the highest paid people in the country generate stellar returns. The reality is that the average professional money manager is doing worse than the market. 200 Equity-bond index Hedge Funds January 1, 2003 = 100 Weighted index: S&P 500 (60%) and world government bonds (40%) 180 160 140 120 100 Source: The Economist 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Hedge Funds Underperform the Market 40% Managed Funds 34% 27% 20% Over long time periods, only a 14% 12% small proportion of managed funds beat their benchmarks. 1 YEAR 5 YEARS 10 ΥEARS 20 YEARS 30 YEARS 40 YEARS Even the most successful investors have periods of underperformance. 60% 40% 20% 0% -20% -40% Warren Buffett's Berkshire Hathaway has underperformed the S&P 500 in 3 of the last 10 years. +4.4* Investor Bill Miller had 15 years of market-beating +54* returns and was In the last 10 years of his career Between 2006 and 2008, thought of as an investing legend. he underperformed the market his funds lost 54%. by an average of 4.4%. The cheapest funds are the most successful "Star ratings" of funds and other similar gimmicks provide virtually no useful guidance. Morningstar itself admitted that expenses are a better predictor of Persistence of performance among past success than its own fund ratings. managed fund winners is no more predictable than a flip of a coin. Hedge Funds 10 17% The S&P 500 has outperformed the average hedge fund for 9 of the 10 year return since 2003 last 10 years. Venture Capital 6.9* Only 20 out of 100 VC funds 10 year return since 2003 beat the public markets, after taking into account fees. The Alternative Index Funds Index funds provide better returns with lower fees than actively managed funds. $1,000 invested in 2003 would be worth Venture Capital $1,069 Hedge Funds $1,170 S&P 500 $1,610 Why do people continue to - Investors are duped by slick managed fund marketing. - Belief that "you get what you pay for"| - that higher fees mean better results. buy managed funds? - Deference to "professionals" - Thinking that you can pick the active managers who are better than average Experts have offered a variety of explanations Sources http://forbes.com/sites/rickferri/2013/04/04/index-fund-returns-get-better-with-age/ http://finance.fortune.cnn.com/2013/03/01/buffett- shareholder-letter/ http://basonasset.com/what-if-warren-buffet-ran-a-mutual-fund/ http://cbsnews.com/ 8301-505123_162-57326920/legendary-investor-bill-miller-is-stepping-down/ https://personal.vanguard.com/pdf/s296.pdf http://bucks.blogs.nytimes.com/ 2010/08/11/fund-expenses-more-important-than-five-star-status/ http://kauffman.org/uploadedFiles/vc-enemy-is-us-report.pdf http://knowledge.wharton.upenn.edu/article.cfm? articleid=2702 http://businessweek.com/articles/2013-07-11/why-hedge-funds-glory-days-may-be-gone-for-good ://geekwire.com/2013/vc-re s-improve-10year-horizon-investing-wall-street/ http://economist.com/news/finance-and-economics/21568741-hedge-funds-have-had-another-lousy-year-cap-disappoi nting-decade-going For links and a full list of references, see http://businessprofiles.com/news/the-myth-of-the-successful-money-manager BusinessProfiles. businessprofiles.com 07 2004 200 2006 2007 2008