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Step 5: Manager Pickers

inflates the remaining funds’ average returns by 21%, according to CRSP data cited by John Bogle72. A recent Morningstar study found that for the ten years ending March 31, 2014, only 53% of actively managed funds across all categories survived the period73.

The Fired Beat The Hired

Even large institutions and pension plans chase performance, much to their detriment. A study conducted by Amit Goyal of Emory University and Sunil Wahal of Arizona State University found that manager hiring and firing decisions made by consultants, board members and trustees were a waste of time and money. The study, “The Selection and Termination of Investment Management Firms by Plan Sponsors,�74 reveals the negative impact of manager picking. Goyal and Wahal analyzed hiring and firing decisions made by approximately 3,700 plan sponsors, representing public and corporate pension plans, unions, foundations, and endowments. Figure 5-5 shows the results of hiring 8,755 managers over a 10-year period from 1994 through 2003. Note that investment manager performance is measured by average annualized excess returns over a benchmark. The chart illustrates that managers that were hired had outperformed their benchmarks by 2.91% over the three years before being hired. However, over the following three years the managers on average underperformed their benchmarks by 0.47% per year when adjusted for management fees and transition costs. Plan sponsors often proceeded to fire managers who had underperformed in favor of other recent top performers, only to repeat the cycle

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This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...

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