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Even the Best Investment Managers Cannot Outperform the Markets


Many investors want to believe that they can find an investment manager who, based on his or her past performance, can continue to beat the markets and offer superior returns.  Studies of the performance of mutual fund managers have found little evidence of the persistence of good performance or of excess skill among mutual fund managers.

Three finance professors recently completed a detailed study of institutional investment managers who invest for public and private retirement plans, endowments, foundations, and unions.  Their results indicate that as a group these managers also provide little evidence of skill or performance persistence.

This is a significant finding because some have argued that mutual fund managers have a marketing handicap—they have to compete with other managers in a public marketplace where everyone’s returns are open knowledge, and they may have to take extra risks in order to distinguish themselves from the crowd.  Institutional money managers usually answer to sophisticated investment committees who have long-term views of the markets and may tend to pressure the managers less to make sudden moves.

In a paper slated for publication in The Journal of Finance, Jeffrey A. Busse and Amit Goyal of Emory University and Sunil Wahal of Arizona State University looked at 4,617 institutional investment funds run by 1,448 management firms over the period from 1991 through 2008.

“Before fees, we find little evidence of superior performance, either in aggregate or on average,” they said in the paper, titled “Performance and Persistence in Institutional Investment Management.”  They said that once a manager’s style of investing and evidence of stock momentum are factored out, it appears managers offer no extra performance.

“One logical conclusion might be that plan sponsors should engage in entirely passive asset management,” the authors wrote.