Interesting research on actively managed funds

[walkinwood]

I got to this research document from one of Larry Swedroe's pieces on the CBS News site.

Mutual Fund Performance and the Incentive to Generate Alpha - GUERCIO - The Journal of Finance - Wiley Online Library

I haven't read the whole document yet, but the conclusion piqued my interest.

Within the segment of funds marketed directly to retail investors, we show that flows chase risk-adjusted returns, and that funds respond by investing more in active management. Importantly, within this direct-sold segment, we find no evidence that actively managed funds underperform index funds.

My personal experience with no-load, low-ER, direct to investor, actively managed funds has been mixed. I have some that I have had for over 20 years because they've consistently beaten their indexes, but I had to jettison others after bad performance.

 

[galeno]

From 1930-2010 a 60/40 port had a gross real return = 5.0%. Subtract our ER = 0.3% + TR = 0.4% leaves us with 4.3%.

0.7/5.0=14%. We take 100% of the risk but get only 86% of the reward.

Add 1.0 % active manager costs to this and we're now getting 66% of the market returns.