Throughout the week, I run across articles that may be of interest to you. In today’s Articles of Interest series, I am sharing an article titled Institutional’s Tiny Edge.
In this article, author Larry Swedroe references a study that shows institutional asset managers outperform retail investors. However, the study goes on to say that the outperformance is only a mirage since the asset manager deviated from the benchmark.
In our industry, we call this Style Drift. This is when a mutual fund deviates from its intended purpose. For example, you may own a Large Cap Fund, but the manager may actually drift into Small Cap stocks.
So, at the end of the day, outperformance of a benchmark never really occurred at all, because the fund manager deviated from the benchmark. This actually creates a “false advertising” of sorts and leads to an unfair, biased comparison.
Additionally, the outperformance only occurred as a result of deviating into areas that have historically provided higher returns such as small cap and value stocks; something that we are big proponents of.
So, the next time you see a fund touting performance greater than its benchmark, there may be more to the story.
How do you feel about fund companies that make these types of claims? What are your thoughts on active versus passive investment strategies? Please feel free to share any comments, questions, or experiences you have below.
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