One of these days I’ll come up with the punchline to this joke, but until then, I’ll share the following observations.
Over the last decade I’ve made a hobby of collecting reasons professional fund managers have made for failing to beat the market. Just in the last five years, I’ve documented the following:
- “Market breadth too narrow.” Translation: Facebook, Amazon, Netflix and Google were leading the market. Of course, there was nothing to prevent an astute portfolio manager from overweighting their portfolio in these names.
- “The market is trading in too narrow a range.” Translation: This was the mantra of active managers from 2015 – 2017 when the S&P 500 traded in a band from 1850 to 2150. The implication is stock picking success requires taking advantage of large swings in the market.
- “We need a full market cycle.” Translation: To be honest, I’m not exactly sure what this means. Perhaps the implication is that active managers can time the market, buying during a market decline and selling near the peak.
- “Active managers do better in a volatile stock market.” This was from a Goldman Sachs report in May 2018. “The performance of the highest conviction stock positions has also driven above-average outperformance since January. The landscape has benefited from modestly higher dispersion.” Wow, this narrative certainly sounds impressive. Yet, the facts below paint a much different picture. If stock pickers benefited from “higher dispersion” in May, they should have loved December when the S&P 500 went from 2760 to 2416.
An article in the February 11th Wall Street Journal (The 2018 Comeback That Wasn’t for Stock Pickers) points out that despite the volatility we experienced in 2018, active managers continued to struggle to beat the index.
I often tell prospective clients the only thing I ask that they take on faith is that capital markets work. Perhaps I should add, please leave Santa Claus, the Easter Bunny and active management where they belong - in the file marked “Make Believe.”