Are Most Investment Managers One Hit Wonders?
What the Evidence Consistently Says
Gotye’s ‘Somebody That I Used to Know’ reached number one on the Billboard Hot 100 and stayed 8 weeks on the chart. His second most popular song has less than 3% of the number of streams, though, which has many calling Gotye a One Hit Wonder.
What has me writing about this for an investment firm?
Over the past few weeks as an intern for Fiduciary Wealth Partners (FWP), I’ve been doing research on the success of investment managers as compared to benchmarks, which can generally be replicated within a few 10ths or even 100ths of a percentage point net of fees by investing in index funds.
Unfortunately, what I have found has me thinking about Gotye.
In line with other research that FWP has summarized, which are listed at the bottom of this post under Related Reading, the findings of a new report out from S&P Dow Jones Indices are what makes me say this.
As the chart below illustrates, over the past 20-years their researchers found that only 6%, or less in some asset classes such as Large Cap, Small Cap and Emerging Markets, have outperformed.
As someone who is about to continue my studies at Tufts with a focus on Economics in the hopes of having a rewarding job in Finance, the data is unsettling.
Many talented and well-resourced professionals who have pursued one of my potential career paths have faced challenges in adding significant value.
Our natural human hubris may make us think that we can be the one that beats these odds. This may be true but, as manager performance fluctuates yearly, it is highly improbable.
And by improbably slim, another study suggests that the success rate has been Zero.
When looking for star funds that continued to produce hits, the same Dow Jones research group, SPIVA, found this…
“Among top-quartile funds within all reported active domestic equity categories as of December 2019, not a single fund remained in the top quartile over the next four years.”
I will continue my studies in this field, keep questioning, and believe that hard work pays off.
Based on these findings, however, and others that reach similar conclusions, I’m leaving this experience thinking that this quote from an FWP piece that highlights the long-term success of simple index fund strategies may be the best way to consistently produce chart topping results.
“Rather than hard work translating into complex solutions, maybe we should work harder on being simple.”
Related Reading:
Are Selectors Good At Selecting? – Elisabetta Basilico, PhD, CFA and Preston McSwain
Is Top Manager Performance A Random Walk? – Charlie Henneman, CFA and Preston McSwain
The Certain Drag on Performance – Charlie Henneman, CFA and Preston McSwain
The Simple Alternative – Charlie Henneman, CFA and Preston McSwain
SPIVA Persistence Scorecard – Year End 2023 – S&P Dow Jones Indices
SPIVA Long-Term Scorecard – Year End 2023 – S&P Dow Jones Indices
The Difference Simple Alternatives Can Make – 15 for 15 
The Road Less Traveled – Simple Alternatives Are Most Investment Managers One Hit Wonders?