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Outperforming Professional Money Managers

I saw an article recently about how effective professional money managers are at outperforming the S&P500. Again, when I refer to the “market” I am looking at the S&P500. Also, when I am talking about “professional money managers” I am referring to actively managed mutual funds. Specifically, equity managers, known as stock managers.

Here is your Cliff Notes summary, or TL/DR as the kids call it. The large majority of these professional money managers underperform over the short-term, long-term, and even after they have a good run it is short-lived. If you want to beat them, just hug the S&P500 index. 

That’s it. You can leave now. Unless you want a few more details. 

Let’s look at some annual data. Over the last 20 years, there have only been three years where more than half of Large Cap Equity Managers have outperformed the S&P500 for those individual years. The specifics are 51% in 2005, 55% in 2007 and then 52% in 2009. Yes, it has been more than a decade since a simple majority of these professional money managers have done better than their index. 

Can I put quotation marks around professional yet? I think I will. 

These “professionals” always like to tell us how they are better designed for years when the market is down. Sounds like 2022 should be a great year for them, right? Not so fast. Again, a majority of the pros are once again underperforming the S&P500. Now, in their defense, 49% are outperforming the S&P500 through June 2022. However, since they say they do better in down markets I would expect a better number. I am sure there is some valid excuse they have (please note sarcasm font). 

These are all short-term numbers based on a year-to-year measure. I want to mention longer-term performance as that should be kinder to them. Well, if you recall any of the long-term data I have shared before you know this is not the case. For the decade that ended 2021, nearly ¾ of equity money managers failed to outperform their index. Yikes! 

You’ve probably heard the term “hot hand.” I think of this when I hear the old disclaimer of “past performance does not guarantee future results.” With that background, let’s see how some of the pros who were doing well in one year did the next few years. Of the 29% of Large Cap managers who beat the S&P in 2019, 75% beat the S&P again the next year. Unfortunately, the wheels fell off in 2021 as only 9% of this original group beat the index. 

There were 791 Large Cap funds in 2019. Good luck picking the small minority of funds within this large universe who will continue to outperform for ONLY the next two years. 

On the more serious side, picking stocks is an incredibly hard thing to do. For the 20-year period of 2000-2020, only 22% of individual stocks in the S&P500 outperformed the index itself. 

During this same period, the S&P500 grew by over 320%. The median stock gained a bit over 60% during the same period. 

This is why I am proponent of just buying the index and forgetting the false hope of trying to find the right “professional” money manager who I pray can outperform the market on a one-year basis, let alone a 10-year time period. As mentioned before, only 9% of these managers beat the S&P500 from 2019 through 2021. Had you just bought the index you would have done better than 90% of “professional” money managers. 

I would rather spend my time investing on being average, which in this case is above-average over 90% of professional money managers. For those constantly looking for that “professional” who can outperform the market on short and long-terms, feel free to keep pushing that rock up the hill. I am sure you and Sisyphus will get there one day.  

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.