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Few fund managers outperform, but what makes those few who do successful?



Is outperformance down to luck or skill?

Robin Powell: Research into fund performance consistently shows that very few funds outperform the market over the very long term. David Blake at the Pensions Institute in London, who's headed one such study, has put the figure at around 1%.

But that doesn’t mean that all of those managers are genuinely skilful. One of the academics on that research team was Christos Ioannidis, now Professor of Finance at Aston Business School in Birmingham.

Christos Ioannidis: Statistically we’d expect to find some that actually beat the market. The question is, "Is it luck or skill?" It’s very hard to distinguish because even for the outperformance, there is always a distinct probability that it’s simply luck.

RP: Professor Ioannidis has since conducted another study on fund performance, in conjunction with a researcher at the University of Bath. As yet unpublished, that study produced similar results.

CI: During the period of examination fund managers do change, so it is impossible for us to track down the particular fund manager. What we can track down is the funds that have survived, and unfortunately, or fortunately, we could not establish significant evidence of the existence of skills.

RP: So, I asked Professor Ioannidis, what are the chances that a fund manager who has consistently beaten the market over the long term is genuinely skilful?

CI: Well, it’s impossible to tell, the only thing that can tell you, it is on average, the funds that overperform the market, 60% is skill, 40% is luck. Now, these go together, you simply cannot separate the two. So when you see a successful manager, you know half of it is her, half of it is the gods. Which bit of the half? You just don’t know.

RP: Remember, by the law of averages you would expect some outperformers. What the data shows is that the vast majority of funds are consistently underperforming.

CI: To me, the most interesting thing is not the over performance. To me, the most interesting thing is the set of underperformance. Because one has to ask oneself, why do they keep existing? Because these are doing systematically below the market performance. This is a bit of a puzzle.

RP: That was Prof Christos Ioannidis from Aston Business School. Thank you to him — and you for watching. Goodbye.

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