Most Popular ArticlesProfessor Finance, University of Denver
CEO & Director of Research, AthenaInvest, Inc.
May 26, 2009
Conclusions
Managers who continue to actively place stock bets outperform and get better over time. Looking carefully at “active” US equity funds is necessary to ensure managers continue to be truly active. Remaining active is evidenced by a small number of stocks, sector tilts, high active share, high tracking error, high style drift, or, in the case of this study, low market index R2. Such funds generate positive excess returns net of fees, on average, with performance improving with age.
Reassuringly, funds get better with age if they continue to actively place stock bets. Skilled managers indeed get better with age. In fact, by expanding Active R2-R to include those funds in the bottom three R2 quintiles and the top three return quintiles (about half of the funds), the average excess return remains positive. So, half of US equity managers are truly active and demonstrate strong stock picking skills.
On the contrary, the average “active” US equity fund underperforms and gets worse with age. A large number of funds can survive in the face of declining performance by effectively plugging into the current style grid-based distribution system and becoming a fund distributor rather than a fund manager. Style grids constrain managers to style boxes, making it extremely difficult to remain active. On the other hand, the style grid facilitates distribution across multiple fund sales channels. Powerful industry forces destroy fund performance.
References
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