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Letter to the Editor: Identifying Skillful Managers
May 27, 2008
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The following letter is in response to two letters to the Editor published last week.

Dear Editor,

Ian Post asked for an explanation for why Marketocracy’s active management process “seems not to be adding alpha over the past five years” because we have lagged the mid-cap core benchmark for that period. If the fund was limited to mid-cap core stocks I would agree. 

But, I think investing skill is demonstrated if the stocks in which we invest outperform the universe of stocks from which are allowed to choose. While Morningstar does indeed show us behind the mid-cap core benchmark for the past 5 years, it also shows us ahead of the S&P 500 for the same period. Which benchmark better reflects the universe of stocks from which the fund can choose?

The prospectus says the fund invests in stocks of any size, seeking to outperform the Standard & Poor’s 500 Index.  The Fund is not constrained by any particular investment style.  At any given time, the Fund may tend to buy “growth” stocks, “value” stocks or both.  Clearly, the fund’s universe is not limited to mid-cap core. 

The S&P 500 is the better benchmark for us because it covers 80% of the market value of the entire universe of U.S. stocks. In addition, since the most widely used passive products are tied to the S&P 500, it is the benchmark an actively managed core fund needs to beat to show that it can be competitive with an index fund.  

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