Resolving the Dichotomy between Investors and Managers about Whether Active Management Beats the Index

Jeffry Haber 
(Accounting Department, Iona College, USA)

Abstract: In looking at the question of whether US Equity managers can outperform a relevant benchmark, a previous paper discussed the dichotomy of views between investors and managers. This paper tries to reconcile the divergent views and understand why each group believes what they do. The previous paper provided evidence for both views (managers could not outperform an index on an annual basis, but did provide a cumulative return that exceeded the cumulative index return). Now I take the cumulative return and consider the entry date into the fund in order to see if it matters to an investor whether then they became an investor in the fund. 84% of the Large Cap Core funds outperformed their index over the entire 11 history. At the other end of the time spectrum, only 41% of the funds outperformed the index on a cumulative basis over the last 3 years of the span (entry date of 2009). This might help explain the divergent views—investors would enter a fund based on the recent success of the fund; however, the possibility of their obtaining a cumulative return that was greater than then index declines substantially. This explains how managers can point to their cumulative return over their 11 history as superior to the cumulative index return, but this is not experienced by investors late to the party.

Key words: investing; active investing; passive investing; benchmarks

JEL code: G11