Manager Selection
Avoid futility in your choice of manager.
An active manager selects individual securities, trying to outperform a market benchmark such as the S&P 500. With passive management, an investor buys a slice of the market using index funds.
In any one year some active managers exceed their performance benchmark. Unfortunately, more often than not the managers’ performance falls in subsequent years, wiping out previous gains.
The graphic below shows the top fund managers of 1998.
Notice what happens next. While Transamerica Premier Growth was 1998’s third top manager, by 2000 it was in the dumps –
in the 88th percentile. Looking at the other top funds we see that later performance had little relation to initial success.
Numerous academic and industry studies confirm this pattern. One study (CDA Weisenberger Database) of all the funds that existed from June 1, 1972 to June 30, 2001 showed that fewer than one percent of them beat the S&P 500 Index.
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