Monday, 14 October 2013

The man who saw through the fund managers: a well-deserved Nobel prize.

Delighted to see that Eugene Fama is one of the three economists just honoured with a Nobel Prize. 

Fama: Nobel Laureate who saw through the trick
I’ve had a soft spot for him for ages. He’s the one who dug into all those claims of fund managers to be such a great asset for your savings. You know, the ones who say entrust us with your money and watch it grow, grow, grow under our inspired and expert nurturing.

What did Fama find? On average, the growth of managed funds over any reasonably extended period – say twenty years or so – is statistically indistinguishable from the growth of a bunch of shares bought at random on the stock market and kept for the same period.

Isn’t that a great finding? Overall, those super clever traders and dealers add absolutely no value above the average behaviour of the stock market: some may get a better return, but for each of those, there
’s one who under-performs. Taken as a whole, their expertise contributes nothing to getting funds to grow better than they would on their own.

Savour that irony for a few moments. Smile at it. For now.

Because the next piece of the jigsaw’s less funny. All these clever guys charge a fee. So the performance of managed funds, from the point of view of the client, is actually less good than the random behaviour of the stock market.

Of course, like most people, I’m far too lazy to go out and buy my own shares. My pension is dependent on funds managed by some of these characters. So I contribute to keeping them in the lifestyle to which they’ve grown accustomed.

Which is a great lifestyle. Those fees generate some mouth-watering salaries. Funded by the general indolence of the many like me who prefer to depend on them, rather than on ourselves.

Fine work, if you can get into it. Which takes ingenuity. But then I did say they were clever.

All of which makes me deeply grateful to Eugene Fama for having cut through all the tinsel glamour that surrounds that profession. And delighted that the Nobel prize committee shares my esteem for him.


Faith A. Colburn, Author said...

So I think you're saying the rest of us have to get off our backsides and actually invest for ourselves if we hope to come out ahead. Grrrrr.

David Beeson said...

A tedious prospect, isn't it? And not a little scary...

Awoogamuffin said...

Am I not mistaken in believing that, in those 20-year spans, you could actually simply buy government bonds and still come out ahead compared to these funds? Or maybe I've conflated two different stories...

If I'm right, investing would be pretty easy, though at the moment with yields so low, not so exciting.

David Beeson said...

Perhaps over a twenty-year span it wouldn't be so bad.