Outperforming managers with skills hard to find
Highly skilled fund managers producing consistent levels of outperformance are hard to find with the top 16 per cent of managers only able to produce an average outperformance of two per cent and the top two per cent of managers producing an average of 2.5 per cent according to analysis by Morningstar.
In a recently released paper Morningstar fund manager research strategist Samuel Lee stated that while these were theoretical returns they were likely to be even lower due to the impact of fees and the possibility that managers may have benefitted more from luck than skill in producing outperformance.
Lee referenced research conducted by Eugene Fama and Kenneth French in 2010 which examined managed funds performance for an 18 year period ending in 2006 and stated that while skilled and unskilled managers existed the methodology of finding skilled managers required in-depth examination of long term performance and manager skills.
Lee said the research conducted by Fama and French stripped out the above-benchmark return of each fund examined and ran simulations which found that many managers outperformed more by chance than skill.
When skill was reinserted into the simulations Lee said "an injected standard deviation of 1.25 per cent annual returns from skill made their simulations look like the historical distribution" with a manager working at one standard deviation above the average placed in the top 16 per cent of managers. At the same time a fund two standard deviations above the mean would be able to generate 2.5 per cent outperformance and is in the top two per cent of managers.
According to Lee the data gathered in the research suggested "that strong past performance is not sufficient to identify one (a skilled manager), unless perhaps if his record is exceptionally long. A manager who can be reasonably expected to beat the market after fees is rarer than rare and requires a heck of a lot more information to identify than historical performance."
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