75% of portfolio managers underperform. I am told this by everyone. I am strongly inclined to believe it, simply because everyone else does. Even clever people tell me people like me cannot outperform consistently. Except I have, for 9 years with the exception of 2000, outperformed the market, or a benchmark of stocks based on a sector or grouping of sectors, generally based around telecoms and technology.
Today I discovered that of all the funds I know to be actively managed by employees of my beloved Swiss gnome overlords (admittedly not a scientific sample, neither the funds nor the gnomes), all are currently ahead of their benchmarks. The Euro small-mid cap guys I sit with told me that largely all their peers are ahead of their benchmarks for the year. While this evidence is only anecdotal, it still does not compute, and I can think of a number of interesting explanations: I am acquainted with the cream of global investors, all the bad funds have disappeared in a remarkable example of survivors’ bias, or the 75% rule doesn’t actually work all of time. There may be other reasons.
Then there’s this, from that interesting Odd Numbers blog on Portfolio.com. Norwegian individual investors who beat the market consistently over a period of time tend to continue beating it. As the unshaven Odd Numbers blogger Zubin Jelveh points out,
In fact, the oft-cited statistic that 75 percent of mutual fund managers can’t beat a market index may apply here too. The researchers say a substantial proportion of individual investors can outperform the market, but unfortunately they don’t say what that proportion is. (I’ve gotten in touch with the researchers about this, and will update as soon as I find out more.)
I too would be interested. It may be that only 25% of managers outperform, but it my also be that this 25% do so reasonably consistently. This is a much more interesting statistic than that 75% of them underperform. Making sure one’s money resides with these guys would be the right thing to do, and much much better than holding silly index funds. To be sure there are duff managers, I have met many. Caveat emptor, blah blah. But it sounds like consistent past performance over a long time may indeed be a guide to future returns.
It might also be that the 75% statistic is simply wrong, and here’s the thing: I haven’t ever found the source data. Has anyone? I googled my brains out trying to find it. I probably won’t send a copy of Spinoza’s Ethics in the original latin to whoever sends me the link, but I might, so you may as well try.
Might someone just have made it up?