In the era of perpetual reality TV offerings it is no surprise that Big Foot has finally nabbed his own TV series. And like most outrageous reality TV I caught myself watching for a few minutes.
While it’s almost impossible not to enjoy the spectacle of grown men and women hunting down the elusive beast and honing their Big Foot Call, most rational viewers shake their head at the futility of the exercise. Where is the substantial proof? This is not the 1960s. Fuzzy videos are ancient history. We have night vision goggles, infrared cameras, and HD video in the hands of almost every cell phone owner. Surely some irrefutable evidence would have surfaced by now. If you are to convince me I want an image so clear I can count his pearly whites. That is the type of evidence the technology today demands.
It is precisely this same thought that went through my head when I read the words from a recent WSJ article mentioning the performance of actively managed mutual funds for the first two months of 2012.
“Many fund managers are doing a far better job of beating stock-market benchmarks this year than they did in 2011. Among diversified large-stock funds, 64% beat the Standard & Poor’s 500-stock index in the first two months of 2012, versus only 20% in 2011, according to Morningstar Inc.”
“It’s the Sasquatch!” I thought. Or you may know him by his other name “The Active Manager.” He has poked his head out for us to have a glimpse, but surely he will scurry into the bush just in time to leave the image on our photos blurry.
It may seem like a farfetched illustration, but follow my logic for a moment. Much like the camera technology of the 1960s pales in comparison to what is available today the stock market data is very similar. In fact, it was virtually nonexistent until the Center for Research in Security Prices (CRSP) was founded in 1960. Since 1960 academics have gradually filled in the gaps. Rex Sinquefield and Roger Ibbotson first published their comprehensive book “Stock, Bonds, Bills and Inflation” in 1984 based on their original 1976 study taking multiple data sets back to 1926. Eugene Fama, Kenneth French, and James Davis subsequently extracted stock market factor returns also going back to 1926, completing the entire data set for the first time in 2000, and it was not until 2006 that CRSP released their latest update of data which now contains daily stock market returns from 1926 to present.
If Big Foot hunters in 1960 had access to Kodachrome then investors in search of successful stock pickers at that time might as well have been trying to decipher hieroglyphics. Thankfully this is no longer the case and the fact is we DO have significant data resources at our finger tips. Data is plentiful and computational power is cheap. So what has the new information provided us? Has the active manager come into focus?
It appears the answer to the second question is no. Researchers and academics continue to publish research that reinforces the idea that active management is a negative sum game (after fees) and even if there are successful active managers it is impossible to distinguish them ex-ante. It is much more likely the active managers’ results are a product of luck than skill (See “Luck versus Skill in the Cross Section of Mutual Fund Returns” Fama 2009).
On the other hand, analyzing the historical data continues to strengthen the case that a broadly diversified efficient market portfolio will provide a return commensurate for the risk you take. And more importantly it can predictably guide you to retirement and beyond. This begs the question: “If I don’t need active management to reach my goals, why bet my retirement on something that may or may not exist?”
So the next time you are checking your Morningstar Ratings or listening to CNBC argue over stock picks. Remember the Sasquatch and ask yourself: “Why is this investment picture so blurry?”