Title, authors, journals
Title: Five Myths of Active Portfolio Management
Author: Jonathan B. Berk
Journal: THE JOURNAL OF PORTFOLIO MANAGEMENT
Research Question + underlying intuition
Hypotheses
1. The return investors earn in an actively managed fund measures the skill level of the
manager managing that fund.
2. Because the average return of all actively managed funds does not beat the market, the
average manager is not skilled and therefore does not add value.
3. If managers are skilled, their returns should persist—they should be able to beat the market
consistently.
4. In light of the evidence that there is little or no persistence in actively managed funds’
returns, investors who pick funds on the basis of past returns are not behaving rationally.
5. Because most active managers’ compensation does not depend on the return they generate,
they do not have a performance-based compensation contract
Interpretation
- Managers who do well in one year are no more likely to do well the next year.
o This fact is widely interpreted as evidence that the performance of the best
managers is due entirely to luck rather than skill
THOUGHT EXPERIMENT
- When capital is supplied competitively by investors, but ability is scarce, only participants
with the skill in short supply can earn economic rents.
- Investors who choose to invest with active managers cannot expect to receive positive
excess returns on a risk-adjusted basis.
- In any economy with rational profit-maximizing investors who compete with each other, all
expected risk-adjusted excess returns must be zero, and realized excess returns must be
unpredictable.
Title: Five Myths of Active Portfolio Management
Author: Jonathan B. Berk
Journal: THE JOURNAL OF PORTFOLIO MANAGEMENT
Research Question + underlying intuition
Hypotheses
1. The return investors earn in an actively managed fund measures the skill level of the
manager managing that fund.
2. Because the average return of all actively managed funds does not beat the market, the
average manager is not skilled and therefore does not add value.
3. If managers are skilled, their returns should persist—they should be able to beat the market
consistently.
4. In light of the evidence that there is little or no persistence in actively managed funds’
returns, investors who pick funds on the basis of past returns are not behaving rationally.
5. Because most active managers’ compensation does not depend on the return they generate,
they do not have a performance-based compensation contract
Interpretation
- Managers who do well in one year are no more likely to do well the next year.
o This fact is widely interpreted as evidence that the performance of the best
managers is due entirely to luck rather than skill
THOUGHT EXPERIMENT
- When capital is supplied competitively by investors, but ability is scarce, only participants
with the skill in short supply can earn economic rents.
- Investors who choose to invest with active managers cannot expect to receive positive
excess returns on a risk-adjusted basis.
- In any economy with rational profit-maximizing investors who compete with each other, all
expected risk-adjusted excess returns must be zero, and realized excess returns must be
unpredictable.
