I subscribe to the S&P Indexology blog. It’s written by S&P staff involved in manufacturing the company’s well-known financial markets indices. Usually it’s interesting, although the writers’ true-believer conviction that no active manager is capable of matching–to say nothing of outperforming–his benchmark index often shines through.
Yesterday’s post, titled “Hope over Experience, ” is a case in point. It takes on a recent, pretty silly Wall Street Journal article that muses about an “Old-School Comeback” of active stock mutual fund management, based on recent outperformance of the average active manager over the S&P 500. “Recent” in this case means the first four months of 2015; “outperformance” means a gain of .33% versus the S&P.
The obvious observations are that the time period cited is extremely short and that the gain versus the index is probably statistically insignificant. S&P Indexology goes on to say that the comparison itself is bogus. The S&P 500 is neither the appropriate or the actual official benchmark for many stock mutual funds, which have, say, growth, value, small-cap or other mandates and other benchmarks than the S&P 500.
So far, so good.
Then come two comments straight out of the university professor’s playbook:
–The first is the argument that because an active manager’s portfolio structure may be dissected, after the fact, into allocations that could have been replicated by indices, actually creating and implementing that structure in advance has no value. That I don’t get at all.
–Indexology concludes by suggesting that because investing in the aggregate is a zero-sum game–the total winner’s pluses and losers’ minuses exactly offset one another, before costs–there can’t be any individual investors who consistently outperform.
I believe that life in general, and investing in particular, is a lot like baseball. (I’ve been thinking about baseball recently because it’s in season). The second Indexology comment is much like saying that the Giants’ winning three World Series in five years is a random occurrence. …or that the change in ownership of the Cubs and the hiring of Theo Epstein have nothing to do with the club’s success this year. Yes, bad teams get a preference in the draft each year, but the end to a century of futility?
…and what about the Braves and Cardinals, who consistently field above-average teams even though their draft positioning does them no favors.
To be clear, I’m an advocate of index funds. My reasoning for this is not that outperformance is impossible (the ivory tower orthodoxy) but that it takes more time and effort than most people like you and me are willing to put in to locate and monitor active managers. I’d be much more comfortable with Indexology saying this.