Hey everybody! The Emperor is butt naked!


In Hans Christian Andersen’s fairy tale of The Emperor’s New Clothes, two fund managers tailors promise an emperor a new suit of clothes made of the finest and most expensive fabric.

They explain to the Emperor and his advisers that the fabric is invisible to people who are stupid and don’t understand tailoring.

When the Emperor parades before his subjects in his new clothes, no one dares to say that they can’t see any clothes until a child cries out:

But he isn’t wearing anything at all!

I was reminded of this recently by The Evidence Based Investor who brought the magnificent infographic below to the attention of The Escape Artist.

Since 2002, S&P Dow Jones Indices have published the SPIVA Scorecards which are the scorekeepers of the active (i.e. high cost) versus passive (i.e. low cost index fund) debate. They measure the performance of actively managed funds (actively mismanaged would be more accurate) versus the benchmark index across the various asset classes and investing styles.

Financial independence

The evidence from the scorecards in the USA and in Europe is overwhelming and consistent with the findings of other independent studies. The results consistently show that professional fund managers underperform the index over the medium to long-term.

For example, take a look at the top left graph on the infographic above “S&P 500 vs. Large cap funds”. This shows that over a 10 year period, 82% of actively managed funds underperformed the S&P 500 index.

As it happens, I do actually believe that some individuals have the ability to outperform the index. But individuals who can do that consistently are very rare. Warren Buffett is famous because there are so few people with a long enough track record of underperformance to be confident that they have the “special sauce”. And its no use paying a star hedge fund manager 2% a year to outperform the market by 1% a year. You lose 1% a year with that deal.

I could go on…but sometimes less is more.

And that graphic says it all.

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  1. There are more and more signs I need to review my allocation… What is holding me back?

      1. It is the believe they are less volatile than the market and still yield quite well. At least, that is what happened throughout 2008-2009 and the bull market after that.

  2. No surprises there really. The bit that I struggle with is that I know active fund managers won’t do as well, but I’m expected to refer my clients to our firm’s financial planners who are essentially active fund managers. So I know that it’s not in the best interests of the client (and the financial planners charge some serious fees), but that’s the way the game works.

    How do you tell a group of people (like the financial planning team within your own firm) that they’re completely unnecessary?

    1. Good question…I think the career maximising answer might be: silently

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