If you read our recent post, you’ll understand that active fund managers can’t out perform the markets. But still you might ask – Yeah, but what about Anthony Bolton?
When faced with the overwhelming evidence which attests to the futility of following the market timing and stock picking activities of active fund management, investors often point to the results of superstar fund managers, like Fidelity’s Anthony Bolton, to justify their position. Rather like gamblers who decide which horses to back depending on the jockeys hired to ride them, “manager pickers” seek to maximise their chances of investment success by tracking and backing the most successful managers. Indeed, there are whole publications devoted to this “cult of personality,” but the actual results are not encouraging.
Yes, it is true: a small number of managers do enjoy extended periods of market out-performance, greater than could be achieved by chance alone or attributed to the market, value and size risk effects described by Professors Eugene Fama and Kenneth French (covered in detail later). However, it is the very scarcity of these star performers that should serve as a warning to investors. Of the thousands of active managers, stockbrokers and analysts operating in the world’s financial marketplaces only a tiny fraction achieve any prominence based on their results. Once achieved, however, their success breeds problems of its own, not least of which is the difficulty of managing the market impact of a large and unwieldy fund and the shortage of genuine opportunities to add value.
Ultimately, even the best performers recognise that there is a time to call it a day. But for investors looking to their pension funds to support them in retirement, there remains the difficulty of seeking the next Anthony Bolton without knowing where or when he or she will emerge.
Having explored the challenges that face investors, we now move on to examine the solution – one which provides the highest probability of delivering a successful investing experience: a globally diversified portfolio of index funds, tilted to small and value and tempered with fixed interest investments, with fees kept to the minimum.
Let’s move on.