The Very Best Active Managers May Earn Their Fees
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Monday, February 1, 2010

The Very Best Active Managers May Earn Their Fees

Active fund portfolio managers may not be happy with the January wrap up published by the Wall Street Journal Monday morning. The paper highlights three recent studies of mutual fund performance that each find that past returns do not do a good job in predicting the future. Yet, there is a glimmer that active managers do add value hidden in the papers.

The final paper of the trio covered by the paper comes from Chicago's Eugene Fama, whose work helped reinforce efficient market theory and provided a foundation for Dimensional Fund Advisors (DFA) and Dartmouth's Kenneth French.

The Fama-French paper suggests that the very best fund managers -- those in the top three percent -- may show returns that go beyond chance. The remainder of active managers underperform their index, according to the paper. The pair published their paper in December.

A second study covered by the paper was published by Advisor Perspectives, also in December. That paper contends that Morningstar's star ratings for mutual firms provide little predictive value and that five-star funds fail to consistently outperform other funds.

Morgan Stanley Smith Barney's Consulting Group study is the third covered by the paper. That study focused on whether top decile managers were able to repeat over a three-year period. The study used data from 1994 to 2007. Interestingly, the MSSB study found that fund in the bottom 20 percent of performance outperformed over the following three years.

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