In case you hadn't noticed, lots of people want to manage our vast fortunes. Many want the job even if the fortune is only half-vast.
This should no surprise. The pay is good. The offices are air conditioned. There is no heavy lifting. Playing golf is an approved communication tool.
Some of our aspirant managers work for brokerage houses offering mutual fund wrap accounts. Some offer private manager separate accounts. Some work for insurance companies offering the same thing with tax benefits. Others work at trust companies with private dining rooms: They offer money management with fine china and historic silver patterns.
All we can know for certain is that they were all born near Lake Woebegone. They all claim to be "above average."
Sorry, it doesn't work that way. It also turns out that there is only one manager who is consistently ahead of his competing peers. And he's ahead in everything. He's way ahead in domestic equities, large or small, value or growth. He leaves the competition behind in international equities. He beats most of the competition in emerging markets. He even leaves most fixed income investment managers in the dust.
What's his name?
You won't find it very often in the financial press. There you'll find the manager of the moment and a few pithy quotes. Indeed, I've been writing about personal finance and investments for more than three decades and I am amazed at how little press this fabulous manager gets.
Now you can say you read it here
His name is Mr. Index. He's the manager who simply tries to reproduce a market index rather than beat it. According to the most recent report from Standard and Poor's, Mr. Index beat most managers in most categories yet again for 2006. He has done this routinely since S&P started doing its quarterly examination of the S&P indices versus actively managed funds.[i] I'll bet big money that the second quarter report, available in mid July, won't be any different.
The Standard & Poor's report shows the percentage of managed funds that failed to beat their appointed index. Since we're supposed to be long term investors, I prefer the figures for the trailing 5-year period. Here's a list of most major fund/index categories and the percentage of managed funds that failed to beat Mr. Index:
Large blend 75.13 percent
Large growth 51.18
Large value 90.74
Small blend 76.47
Small growth 91.78
Small value 62.65
International Small 80.65
Emerging markets 66.67
Long government 89.80
Intermediate govt. 70.19
Short government 75.51
High yield bonds 84.44
Convertible bonds 60.00
Mortgage backed bonds 85.71
Global bonds 63.33
Emerging Market bonds 47.37
I've been tracking related research since the very early 70s. During that time new asset categories have been created such as high yield bonds, mortgage backed bonds, emerging markets, etc. The results, however, have been ominously consistent--- Mr. Index beats most managers virtually all of the time. The odds that any of us, amateur or professional, can select a winning money manager are very poor.
The easiest and fastest way to improve our investment returns is to buy index funds.