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RP: Hello there. Dr David Blake is one of the world’s leading authorities on mutual fund performance. He spent many years studying fund returns in both the UK and the US. In both countries, he found that only a tiny proportion of actively managed funds succeed in beating their benchmarks over any meaningful period of time.
DB: Well, the evidence shows both for the UK and the US, if we’re talking about mutual funds in particular, that a very small proportion, around about 1%, outperform in the long term on a risk- and cost-adjusted basis. So 99% of fund managers deliver negative value added for their consumers once you take into account the fees that they charge.
RP: Of course, it wouldn’t matter that so few managers succeed in beating the market over the long term if you could spot them in advance. The problem is, in practice, identifying a winner, ahead of time, is almost impossible.
DB: Oh you can’t spot the winners in advance. You need a lot of performance from the same fund managers over a large number of years to identify skilled fund managers. And I think that you need a minimum of 10, sometimes 15 years of performance before you can identify the genuinely skilled fund managers.
RP: So, only around 1% of active funds beat the market over the long term, and you can’t spot them in advance. In that case, I asked Dr Blake: Is there any argument for using an active fund at all?
DB: No, not at all. They’re going to lose value because they’re going to be paying for transactions costs and they don’t see those costs. And 1% transactions costs over a 30 or 40-year savings plan will reduce the value of your pension by 30%.
RP: Low-cost passively managed funds are becoming increasingly popular. But they’re still far less popular than actively managed funds. Here’s David Blake’s opinion as to why that is:
DB: It’s marketing. If you’ve got a 36% operating margin in your business compared to a 20% operating margin for the rest of the economy. Why don’t you continue doing the same thing that gets you the business? Reinvent yourself every few years. By the time the strategy has failed you’ve got a new strategy.
RP: That’s it. Thank you to David Blake and to you for watching.
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