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Active fund managers cannot beat the market on a risk and cost-adjusted basis


Discover why there are so few active fund managers in the world who've ever been successful, and why consumers are still sucked in to the myth that actively managed funds can beat the market.

Robin Powell: The fund industry tries to make it seem that paying for active fund management is a no-brainer.

Simply find a star fund manager, the messaging suggests, and invest your money with them.

But one of the problems investors face is that there are hardly any genuine stars to choose from.

David Blake from Cass Business School in London, says they account for a very small proportion of the industry — somewhere around 1%.

Dr. David Blake: It’s tiny in relation to the size of the industry and the size of the assets under management. It is remarkable, that today, we are still talking about this, given that the evidence has been there for thirty or forty years. That active fund managers cannot beat the market on a risk and cost-adjusted basis. You can name the star fund managers, you know them by name. They go back to Graham and Dodd in the US there was Peter Lynch, there was Anthony Bolton over here, perhaps Neil Woodford. There’s a very small set of star fund managers and you can name them.

RP: David Blake has spent many years studying fund performance around the world, and says it differs very little from country to country.

The dreadful performance of funds in the US in recent years has been well documented, but the data for Europe, Asia and Australasia is actually very similar.

DB: If you look at their performance over 20 years, whether they are pension fund managers or mutual fund managers, they can not systematically beat the market. We’ve looked at a whole range of data sets to demonstrate this. We had no vested interest in denigrating active fund managers. We were just looking for the evidence to see, what their genuine performance was.

RP: Why then, do so many investors still use active funds? David Blake puts it down to marketing and the ability of the big fund management companies to keep reinventing themselves.

DB: All the evidence shows, that it fails. On a systematic basis, you cannot time markets. Fund managers cannot time markets. Yet, they continue to think and reinvent themselves and come back with a new strategy which is apparently being backtested and apparently very successful. And unfortunately, consumers are fooled into trying these things out.

RP: Thank you to Dr. David Blake from Cass Business School, and to you for watching.

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