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1929: Lessons from History - Professional Money Managers Performance


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You’ve heard the old saying, that it is important to learn about history so not to repeat it. Well that saying applies to investments more than you might think. As most great investors will attest, investing requires a large amount of reading and research. Now we are not going as far back as 1929. However, we are going back to 1983 and make some important points looking at data in the 60's, 70's and 80's. While doing some research, we found some material about testing the performance of professionals written in 1983. This particular section was packed full of valuable information backed with data and is still as true today as it was thirty-three years ago. And as such, this content is very much worth repeating for the benefit of our readers.


“Apart from corporate officers and directors and exchange specialist, who have access to inside information not available to the public, the overwhelming majority of professional investors* appears incapable of consistently outperforming the market. Studies of mutual funds spanning almost three decades of performance have repeatedly show this. The same appears true of bank investment departments. A 1976 article in Money reported results of a broad-based study of institutional investors:

From 1965 through 1974, fewer than 25 percent of the more than 3,000 professionally managed stock portfolios measured by Becker Securities, a Chicago brokerage firm, were able to equal or better the S&P. This was all the more distressing since in those 10 years total return on the S&P stocks- including dividend and capital growth – averaged only 1.2 percent a year.

Last year’s [1975] bull market boosted the S&P’s 10-year average return to 3.3 percent, but 80 percent of institutional investors in the Becker Study still lagged behind.

A 1978 update of the Becker study revealed that 70 percent of the institutions surveyed over the 1973-1977 period and 85 percent over the 15 years from 1962 through 1977, were outperformed by the S&P 500 Index. As recently as 1980, the Boston Globe reported.

According to a recent Portfolio Evaluator published by Media General Financial Services Inc., in Richmond, Virginia, you could put the names of the largest 1,800 U.S. companies in a hat, mix them up and draw out a fistful- as your investments strategy- and you’d get a higher return than most banks and insurance companies are getting for you. Media General has been studying 30,000 random portfolios since 1972.

The evidence appears conclusive that as a group professional money managers do not outperform the market. The studies have consistently shown that on average the portfolio returns of professional investors fail to exceed and often fall short of the market averages. This is significant because if a majority of professional investors fails to beat the market the amateur must ask whether he can reasonably expect to do any better.” – By Brian J. Stark (1983)

*No formal or rigid definition of professional investor will be attempted. Basically, it refers to those who manage mutual funds, institutional portfolios, and private trusts.

We would agree, using the data, that professional money managers do not outperform the market. And in addition their pricing structure is not correlated to their performance which adds even more salt to the wound. So why should a person pay these higher fees for such low performance? We would argue that when the so called amateur had an edge, the odds are in their favor.  We believe one edge would be actionable research. As George Soro said, "Investors operate with limited funds and intelligence, they do not need to know everything.  As long as they understand something better than others, they have an edge." Also, Peter Lynch, former manager of Fidelity Investment's Magellan Fund said, "You can outperform the experts if you use your edge by investing in companies or industries you already understand."  Our subscribers have an edge, would you like an edge?   

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 11/1/16





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