Friday, July 13, 2012

Comparing Fund Managers to Golfers and Par

A perennial argument against "active" investment management is that the majority of fund managers don't outperform their benchmarks.  Last year, 84% of managers trailed their benchmarks, a pretty damning statistic. 

Since I like to do offbeat posts on Friday, I thought it might be interesting to compare that statistic to the number of golfers who shoot par.  It turns out that the relative aptitude of golfers and portfolio managers is pretty similar.  Only 25% of golfers break 90.  Less than 1% are scratch golfers.  If par is the benchmark, then most golfers are failing miserably.  Of course, this is a snapshot of all adult golfers, not professionals.  Professionals are expected to break par.  Also, you can't make a decision to "invest" in a par scorecard like you can an index portfolio like SPY.

Still, the very idea of benchmarking performance against an index is one that needs to be considered holistically.  After all, there is no such thing as completely passive management.  If not at the security selection level, there is an active decision made at the asset allocation level.  There are just fewer institutionalized benchmarks to measure the quality of those decisions.  There are likely very few investors with the stomach to hold the SPY as the only holding in their portfolio and keep it that way through retirement, so very few people really get the index return anyways.  Any deviation from the index would technically be underperformance.

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