James Abate, the manager of the soon to be launched PSigma American Growth fund (PSigma backs large caps in America), last week told journalists that American equities are heading towards an “inflection point”.
He argues that America’s largest growth companies are ready to excel again after seven years of underperformance compared with mid and small cap value strategies. Under such conditions, which resemble the late 1990s, he says it will be much harder for active managers to outperform the S&P 500.
In this environment surely investors are better off investing in an index tracker? While this strategy may lose to active managers over one, three and five years, history shows over the longer term, hardly any managers can outperform the index. Over 30 years no single British mutual fund investing in America has outperformed the S&P 500, according to Morningstar.
Over the past 30 years managers have come and gone, funds have been launched and shut and inflection points have emerged and disappeared. Large growth companies may outperform over the next few years but what happens when their performance slackens? Will investors pay a fee and move to a new fund, again promising to be in the next hot area of the market?
For those investors not concerned about 30-year track records, take it down 10 and the index still generally wins. While a few funds have beaten it over time, others have folded.
The problem today is there are few funds with the ability to perform well in all market conditions, the so-called core funds. Even the great Bill Miller, the Legg Mason manager famed for outperforming the S&P for 15 consecutive years, underperformed for the first time last year.
In an efficient market such as America it is hard to see how active managers can justify their fees. A few active managers may outperform the market in the long term but it is hard to identify them beforehand.
Advocates of active management might point to the likes of Bill Miller or Anthony Bolton as an argument against index funds. But the question is not whether Miller or Bolton performed well but whether such managers can be identified in advance. For every Miller or Bolton there are numerous fund managers who underperform their benchmarks.
Winning the lottery would be easy if someone knew the winning numbers before the draw.