Active money managers claim to have market-beating investment strategies, but data shows that the odds of beating the S&P 500 are very low. The track record of active managers beating the market year in and year out is shockingly bad. A 2016 study by S&P Dow Jones found that 99% of actively managed U.S. equity funds failed to beat the S&P 500 over the prior decade. The comparable figures for global and emerging markets funds were 98% and 97%, respectively.
Think about this: You could put yourself in the top 1% of all professional portfolio managers by merely buying an S&P 500 index fund!
Even odds to beat the markets are low, extremely low, they are not zero! So, what does it take to beat the market?
Studies show, there are 4 attributes connected to active fund managers with success:
1.) Portfolio Turnover
Market-beating portfolio managers had a far lower turnover of stocks than the average stock mutual fund. These top-performing managers averaged a 27% annual turnover, compared with a whopping 112% annual turnover for all equity funds. Market-beating portfolio managers had an average holding period of three years for each stock. That compared with less than one year for the average equity fund.
2.) Portfolio Concentration
Portfolios that beat the market over the previous 10 years were also more concentrated than the S&P 500. They had an average of 29% of their assets in their top 10 holdings. The comparable figure for the S&P 500 is 22%.
3.) Investment Style
The vast majority of the market-beating performers focused on a stock’s fundamental valuations. Ignoring factors like momentum or volatility, top managers calculated an intrinsic value for each of their holdings. They then invested only in stocks that they deemed cheap. This approach also meant that top managers ignored the latest financial headlines. They spent no time on forecasting interest rates or the outlook for the economy.
4.) Geographic Location
Only a small fraction of high-performing investors were based in typical financial centres. The top equity funds were based in cities like Chicago, Salt Lake City, Memphis, Omaha and Baltimore.
Lesson:
If you want to become a top money manager, then move to the country side, bet big, hold for the long term and ignore the news!
Sven Franssen