Superior Active Fund Management

Arnott (1993) and Odelbo (1995)

Arnott (1993) reviewed characteristics of equity funds with superior returns, finding 17 actively-managed large cap funds outperforming their benchmark in 37 out of 49 rolling 5-year periods ending 1993. A paper by Odelbo (1995) found great stock fund managers did not exclusively follow one investment style while looking for undervalued stocks. The author also found there was no statistical evidence of their superior performance.

 

Chevalier and Ellison (1999)

Chevalier and Ellison (1999) considered the background of active stock managers and found: [1] those with an MBA added 63 basis points a year to returns but also more risk than their peers, [2] increased portfolio tenure turned in slightly better results, [3] older managers did not perform as well as those younger (maybe because older managers had more job security and possibly less formal education), and [4] those from high-SAT colleges did better.

 

Bryant (2000)

Bryant (2000) in a study based solely on 23 Morningstar Managers of the Year, discovered what he believed were the traits of fund managers who turned in superior performance, shown in Table 7.

 

Table 7

Traits of Superior Mutual Fund Active Managers

 

Audacious	Well educated
Names disclosed to fund’s investors	Above-average tenure as fund’s manager
Manager known for a specific style	Patience and low turnover
Younger than average	Focuses on undervalued stocks

 

Table 8

Traits of Superior Mutual Funds

 

Concentrated portfolios	High degree of tax efficiency
Below-average asset size	Below-average expense ratio
Above-average stability	Comparative return consistency
Below-average beta

 

Warren Buffet said, “Diversification is a protection against ignorance…You concentrate to create wealth; you diversify to preserve it…Inactivity (buy and hold) strikes us as intelligent behavior.”

 

Performance Consistency

Bernstein (1999c) reviewed return consistency of the 30 best-performing mutual funds for five different 5-year periods compared to their returns for the subsequent five years ending 1998. In each of the following 5-year period, the S&P 500 had higher returns than all 30 of the previous best fund performers.