How many investors actually outperform?

Magwitch Offshore

Have you ever sat in traffic looking at the lane next to you with envy, convinced that they’re the only ones making progress? After a few moments of consideration, you make the decision to switch lanes, only to find the lane that you just exited suddenly moves ahead and the vehicle that was previously behind you is now ahead of you, with their taillights heading off into the distance.   

This behaviour is not unique and many people reading this article will be able to recall a similar experience to the laid-out scenario. The majority of us, as humans, are hardwired the same way. We suffer from a lack of patience and invariably feel that we need to be doing something. It’s almost as if doing nothing is negative but there are many moments, such as when we’re stuck in traffic, where doing something actually has the negative impact. 

This holds true for investing. Investors are often reluctant to sit on their hands, questioning every decision that they have made, and constantly looking at other investment alternatives as being the ones that really work. The most common example that occurs are investors exiting the stock market, converting their holdings into cash, and then switching back once the stock market has shown significant returns — often at a higher (more expensive) re-entry point. Humans by nature are bad investors. 

The example I used was one of equities or cash but there are so many more asset classes out there, so many currencies to consider, and so many places in the world to invest. There are a huge number of decisions to be made, all with the risk that those decisions are then unwound at the wrong moment in time. It is for this reason that the passive investment solution (i.e. making as few investment decisions as possible) has been the better performer and why internationally passive investments have received far and away the lion’s share of new investment flows. 

Every six months S&P Dow Jones Indices release their SPIVA scorecard. For this scorecard they compare actively managed funds against their appropriate benchmarks, with research conducted across a number of regions and number of different categories. In the US Large Cap sector, which is where many of the ’mega’ active management funds are located, the SPIVA scorecard indicates that only 27% of them managed to outperform the S&P 500, on a net-of-fees basis. 

In other words, close to three quarters underperformed. The benchmark of the S&P 500 is a passive benchmark, the 500 largest and most liquid companies listed on a US stock exchange are included.  There is no discussion over whether Apple is a better business than Microsoft or whether Amazon will continue to ship products. 

Further, the SPIVA scorecard tells us that the number of actively managed funds outperforming on a 20-year basis drops to a paltry 6%. The fact that only a minority of active managers has led to the current dominant investment thought of ‘rather just buy the market’. As Jack Bogle, the founder of The Vanguard Group, famously wrote, “Don’t look for the needle in the haystack. Just buy the haystack!” Bogle is famous for creating the first index fund – a fund whose constituents are determined by what is contained in the benchmark index, with no deviation from that index. Since the start of his fund, we have seen an explosion in investment products that track indices.  The vast majority of the $10trn ETF industry are assets invested in ETFs that track indices.     

A good investment manager (and there are many great investment managers out there) will make a number of correct investment decisions in their lives, and across the period where the investor has allocated capital to them. It is the few poor decisions that they make (similar to changing lanes) that hampers performance and penalises investors. Sometimes the option that requires less effort produces the best result. 

Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers. 

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