Can A Private Investor Beat Professional Fund Managers?

Not only large fund managers beat benchmarks. Simon Brown discusses two huge advantages a private investor has over such investment firms.

- Simon Brown

A recent study by Morningstar into South African unit trusts showed that the best predictor of which funds would beat their benchmark was low fees. This makes perfect sense. If you have, say, 100 fund managers with the same benchmark, only 50 can beat the benchmark while 50 will under perform. But as soon as we bring fees into the equation, we see the number outperforming dropping markedly.

S&P Global released its most recent S&P Indices Versus Active (SPIVA) research report for South Africa for the year 2016 and it again shows very few funds beating the S&P South Africa Domestic Shareholder Weighted (DSW) Index that they use as a benchmark.

Over one year (a period that is far too short to be meaningful), just over 27.5% of funds beat the benchmark. Over three years just fewer than 20% did so and over five years (the minimum time frame for any investor) a fraction over 23% beat the index. So broadly we can say that one in four funds beat the benchmark. But the trick is knowing which it will be.