Because that's the product that consumers can actually purchase?
I think comparing mutual funds is perfect. These funds hire the managers and the stock pickers--if the management of the funds can't discern which ones are any good, (and apparently they cannot) what would make any of us think we'd do better?
I understand that in general people only can buy mutual funds not mutual fund managers. However, the exceptions, Peter Lynch, Bill Miller, Bill Gross, and Warren Buffet are pretty important. It isn't just management of funds that pay attention to individual managers, manager and manager tenure is one of the key elements of the Morningstar star rating system for a mutual fund. So obviously there are bunch of smart folks who think that stock picking skills are important, it can be evaluated, and are willing to pay for it. (There is a significant amount of luck involved and that is why it is very hard to evaluate)
On the other side are academics who I think pretty much have there mind made up, markets are perfectly efficient so indexing is they right way to go.
I skimmed the 30 page report the guys wrote it is very math heavy, so I didn't read it very carefully. What did stand out is that researchers were very sloppy in one respect. They use terms fund and fund manager interchangeably, but they never track the performance of a single fund manager, just the performance of funds.
Let me give a concrete example why this may matter. During the Dot com bubble Janus was the high flying mutual fund company, lots of its funds were top performer, 5 stars, 30-50%+ returns etc. Near the end of the bubble Janus had a lot of staff turn over, and suddenly Janus funds were dogs.
Now I honestly don't know which came first the staff turn over and than the lousy performance, or did the lousy performance cause staff turnover.
I do remember M* reports on Janus funds (I had some) and M* basically throwing up the hands and say well this fund is on its 3rd manager in as many years, we don't know how to classify this fund or how to rate it. .
However as far as the study is concerned it doesn't matter who manages the fund they all get treated the same. Now I suppose this is ok as long as the fund manager are completely anonymous, but they aren't and some companies actually highlight there top managers. An interesting study would be to track Peter Lynch's investment before and after Magellan. An even better study would be to see if any of the asst managers of Magellan during his tenure, went on to become successful money managers. In other words was there some Jr. manager who actually more responsible than Peter Lynch for Magellan outstanding performance.
Given the current state of the industry, I don't disagree with you or even the researchers is passive indexing is the way to go with mutual funds. But that isn't because fund managers are irrelevant it is because (with rare exceptions) we don't have enough information about the stock pickers to make an intelligent choice.
