Can active management succeed?
14 February 2017 | Portfolio construction
Brian Wimmer: Can active fund management succeed?
At Vanguard, we believe it can. Some fund managers have demonstrated talent and therefore the ability to outperform the market over time.
But there is a catch. For many active managers, that outperformance tends to be eroded by fees. After the impact of costs is considered, the average active manager underperforms the market.
That’s consistent with Vanguard research showing that cost is the most powerful indicator of future outperformance.
Indeed, our research suggests that cost, while not a perfect predictor of outperformance is the most meaningful indicator of long-term outperformance for an active fund manager.
A further challenge of active management is the fact that even the most successful funds will see periods of underperformance. If we look at the 15 years to the end of 2014, and take only the funds that outperformed, we find that almost all of them underperformed for four calendar years or more.
What’s the solution?
In our view, active fund management requires three factors to be successful:
- Talent – Investors must allocate to talented active managers or strategies
- Cost – Reducing the amount you pay increases your odds of outperforming
- And Patience – Investors interested in using active management must acknowledge that periodic underperformance is inevitable
Talent, cost, and patience – these are the keys to improving your odds of success with active management.
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.