Also, last week, Brent Bentrim brought up the idea of defining a manager’s style in terms of a set of passive indexes so that you can use twenty years of data (about the indexes) to assess the manager. However, when I look at Mr. Bentrim’s chart, I don’t see how it is obvious that the best fit benchmark for our fund is the Surz Small Growth Index as he says it is. Apparently, this is important because Mr. Bentrim seems to say that if the best fit benchmark is anything other than the best performing asset class then we have not exhibited skill because we could have done better. I strongly disagree.

In my coin-flipping analogy, trying to identify the best performing asset class would be like trying to pick someone who is going to flip 10 heads in a row. As we saw from the coin-flipping results, you don’t have to be able to do that in order to beat the averages. By running a diversified fund that does not make big bets on any single analyst or asset class, we have a better chance of beating an index fund than if we bet everything on the single analyst with the best track record or the single best performing asset class. Mr. Bentrim’s chart shows that indeed we have always held a mix of asset classes. 

The acid test of whether active management can be a practical alternative to an index fund is whether it delivers a better return after all fees. An index fund tied to a broad market benchmark such as the S&P 500 reflects the results of the average investor. If skilled investors exist, they ought to outperform the average investor. 

It would be easy to choose between investing alongside the average investor or a group of skilled investors with a diversified portfolio, if you had confidence that the group was truly skilled. I realize that the threshold of proof in terms of alpha and length of track record required to instill confidence is different for each person. But after nearly seven years, our track record is providing mounting evidence that investment skill exists and that it can be practically harnessed. 

Ken Kam
President
Marketocracy Capital Management, LLC

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