... That's what I figured - some funds outperform. ...
Absolutely right! It is the
average of all stock pickers that underperforms by the amount of the fees, per Sharpe. If you look at the SPIVA report cards, IIRC about 1/3 of actively managed funds outperform in a given year. But the next year it is mostly different ones that outperform. And if you go out 15 years it is only a fraction of one percent of funds that have outperformed, net, at the end of the period. Essentially, the outperformance is statistically indistinguishable from luck.
Think 10,000 monkeys flipping coins. After 8 flips, about 40 of them will have flipped 100% heads. Genius? (10,000 is very roughly the number of mutual funds that exist.)
And, sadly, it is impossible to pick out the lucky monkeys (err .... active managers) ahead of time. So we are stuck, as French argues, with making random choices if we are trying to pick active managers. And, since the average active manager is a loser, our choices are also likely to be losers.
"...passive funds that tilt toward small stocks, or value stocks, or positive momentum stocks are likely to produce positive [alpha] estimates ...
Yes. That is basically the takeway from the Fama/French three factor model, based on many years of market history. It is also the basis of the DFA fund strategy. No surprise, since both Fama and French have been involved with the firm since its inception.
The issue here is that if everyone knows that overweighting small and value funds is wise, why don't we expect that their prices will be bid up and the predicted future advantage will not materialize?
Here is yet another video, 37 minutes this time, that is very worthwhile. Viewing just up to about 2:44 is good for a laugh, but later on Fama discusses the question of the small & value performance possibly being eliminated plus there is a lot of other good stuff:
INVESTORS FROM THE MOON: FAMA | Top1000Funds.com
To be clear, I would love to find a system or a manager that could be statistically shown to be superior to passive investing. I am as greedy as the next guy. But I have not been able to find one. I tell people that I am so stupid that it took me over 25 years to finally figure out that no one in the investment business knows anything useful and to finally go to passive investing.