January 10, 2010
The 14th Annual Superbowl of IndexingTM December 6 – 9, 2009 Phoenix, Arizona
Gus Sauter, the Chief Investment Officer of Vanguard (a firm that is known for indexing) presented the following data. He showed data from 201 million possible portfolios. The findings are that even with the best professional money managers, portfolios would perform better with some percentage of index funds. Overall only 14% of the actively managed portfolios beat the market at less risk than the market risk. The results varied for US versus European equities and the level of skill of the active manager. The study even looked for the results of managers with perfect skill who had bad luck. Smart is good, but smarts alone, doesn’t assure succcess.
The conclusions are that every investor is better off with a portion of their portfolio not with active managers (or for that matter, not actively managing their own portfolios). For unskilled investors, this is true for 100% of their US portfolio. Also…
“Research validates that the largest U.S. Pension plans are allocating 30 – 40% of their equity portfolios to indexes.”
In addition “The historical analysis has no uncertainty. The vagaries of the future favor indexing more than indicated in the research.”
By far, the single greatest takeaway from all the data is that there is a place for active management for SOME INVESTORS along side of investing in the market through index funds. The sobering facts are that it is very hard to do active management well and consistently. My last two blog postings address this issue from the perspectives of the opposing camps of ‘active’ and ‘buy and hold’.
Any investor or fiduciary should understand how these findings apply to their investment decisions if they are concerned about performance, risk and responsibility.
Tags: Investment Advice, Investment Style, linkedin, NEW
[...] [...]