{"id":495,"date":"2016-04-19T07:14:15","date_gmt":"2016-04-19T14:14:15","guid":{"rendered":"https:\/\/chaltenadvisors.com\/blog\/?p=495"},"modified":"2016-04-19T07:14:15","modified_gmt":"2016-04-19T14:14:15","slug":"outperforming-market-benchmarks-possible-but-painful","status":"publish","type":"post","link":"https:\/\/chaltenadvisors.ca\/blog\/outperforming-market-benchmarks-possible-but-painful\/","title":{"rendered":"Outperforming market benchmarks possible but painful"},"content":{"rendered":"

What does the data tell us about how to invest successfully? \u00a0If you scour the world of peer reviewed academic studies over the last few decades (don’t worry you don’t have to because we and many others have) you’ll learn that the evidence clearly points to keeping costs low and keeping holdings very diversified. \u00a0Unfortunately for those fund managers that try to perform better than market benchmarks by picking better securities\u00a0or timing market swings, the data shows clearly it’s not worth paying their fees to do so. \u00a0Statistical Ideas<\/a> kindly aggregated the latest\u00a0S&P Indices data<\/a> showing the performance of the average active fund manager\u00a0across a variety of countries and asset classes over ten years versus simple market benchmarks.<\/p>\n

\"ActiveVsBenchmarks\"<\/p>\n

Not good. \u00a0And don’t think you can overcome this by finding that better than average manager. \u00a0The evidence also suggest it’s nearly impossible to identify outperforming managers in advance. \u00a0In fact a large portion of funds don’t even survive a ten year period, let alone outperform.<\/p>\n

So is the only choice to move all of your investments into low cost index funds based on simple\u00a0market benchmarks? \u00a0Not necessarily – \u00a0the ETFs and index mutual funds that track simple market benchmarks\u00a0are low-cost and should\u00a0outperform\u00a0active funds after fees, but the evidence also shows it’s possible to do better. \u00a0There’s been a lot of hype around “smart beta” or “enhanced indexing” recently. \u00a0The idea is that rather than choosing market benchmarks that use a simple\u00a0market capitalization to weight their index constituents, there are other “factors” that if used to weight the index will yield a superior return. \u00a0Smaller companies, cheaper companies, more profitable companies, stocks with more price momentum or less volatility are all examples of characteristics or “factors” that have been tested by the academic community and shown to yield higher investment returns. \u00a0You would think that by now and\u00a0given how well publicized some of these anomalies are that the market would have caught on and bid up their price to the point where they no longer offered superior returns. \u00a0An interesting research paper highlighted in this recent article<\/a>\u00a0from Alpha Architect takes a look at how some of these factors performed after being revealed to the world by academic studies.<\/p>\n

The bottom line is that these anomalies do exist and have persisted and therefore it has been possible to continue to exploit them by using a superior\u00a0low-cost indexing strategy over\u00a0a simple market capitalization weighted index. \u00a0But of course there is no free lunch and there are catches:<\/p>\n