Comments on: Manager Risk? No thanks.

By: Monevator

Monevator — Mon, 20 Apr 2009 19:15:17 +0000

“To hope that a fund manager can outperform his relevant index without accepting the possibility that he could underperform is nonsense.”

It is exactly because people want to believe that nonsense that lots of mainstream funds have become ‘closet’ index trackers. The managers will keep their highly rewarded jobs if they are within a couple of percent of the index, whereas wild deviation is more likely to get them fired or at the least see the fund suffer.

So you then have the laughable situation of losing a percent or two of performance for a manager to *pretend* to active manage the fund while actually largely following the index and maybe hoping one or two tiny bets pay-off (or at least keep them looking busy at work!)

By: Mike

Mike — Mon, 20 Apr 2009 15:48:16 +0000

Hi Neal.

I’m not defending the State of Oregon here at all. My whole point (however poorly made) was that choosing an actively-managed fund involves a real possibility that the fund manager will make poor choices.

To hope that a fund manager can outperform his relevant index without accepting the possibility that he could underperform is nonsense.

By: Neal Frankle

Neal Frankle — Mon, 20 Apr 2009 15:29:16 +0000

Sometimes investors come back and say “I didn’t know I was taking this risk.” That doesn’t automatically mean the manager is at fault. I’m not trying to defend the industry but I am interested to know if the State of Oregon read the prospectus. If so, they would have known what the fund could do. If they didn’t, isn’t it really their own fault?

By: Brian

Brian — Mon, 20 Apr 2009 15:03:11 +0000

“The way I see it, taking on additional risk only makes sense if you’re being compensated with an increase in expected return. Unfortunately, as we know, choosing active funds over passive funds does not increase your expected return.”
Ain’t that the truth!