Are Mutual Fund Managers Skilled?


Jonathan Berk turns the efficient market hypothesis, which popularized the belief that mutual fund managers were “monkey investors” who consistently perform worse than the overall market, on its head to prove that mutual fund managers are in fact highly skilled investors. And he proposes a new way to accurately measure a mutual fund manager’s level of skill. Berk is the A.P Giannini professor of finance at Stanford Graduate School of Business.


Jonathan Berk: Are Mutual Fund Managers Skilled?

Source: Stanford


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  1. foosion commented on Jun 22

    Index funds perform the same as all active investors, by definition. Index funds have lower costs, so they have better performance. William Sharpe has a classic paper demonstrating this.

    Active investors might consist of dumb individual investors and talented mutual fund investors. In that case, talented mutual fund investors might beat individual investors. That doesn’t mean individual investors wouldn’t be better off in index funds.

    The video essentially argues that active managers are highly paid and the market wouldn’t reward them if they weren’t talented. This is allegedly basic economics. It then argues that managers share the fruits of their skills out of the goodness of their hearts. This would violate the basic economics he claims.

    There is a risk in trying to pick winning managers – you could easily pick a losing manager. Safer to just pick a low cost index fund.

    I’d like to see evidence for his empirical claim regarding persistence of outperformance by active managers, after fees. The classic Carhart study, On Persistence in Mutual Fund Performance, showed they don’t, when you adjust for risk. This has been confirmed in numerous other studies.

    • Iamthe50percent commented on Jun 22

      There is another answer. Perhaps the fees are too high. I’d like to see the before fee performance compared to the index before saying all active managers are worthless.

  2. alonzo commented on Jun 22

    I agree. If you add a positive number (the manager’s fee) to the + or – of the market return, of course you’ll get a number that’s more positive than the market return. This doesn’t measure the manager’s skill, it measures his ability as a salesman. Even a persistently good salesman.
    And I’m sure the Professor can prove that people are making rational decisions when picking their fund managers? The EMT won’t die!

  3. Low Budget Dave commented on Jun 23

    As a general rule, I disagree with the premise that any market rewards skill, (unless you are talking about “salesmanship” as a skill). Stock-pickers, palm-readers, and realty-show TV stars get to the top through a combination of personality, quick wit, and pure dumb luck.

    At almost any big company in the world, you could take the highest-paid person, and switch them with the 50th-highest-paid person, and no one would ever know the difference. Although the CEO will be making 100 times more than (for example) the Asistant VP of sales, it would be impossible to demonstrate that the CEO is working even 10% harder, nor making even 2% better decisions.

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