Cherry-Picking Data to Make Active Managers Look Good

For all you individual active investors reading this, you may be very interested in this recent AAII article about the very problem to avoid in active investing -- how active managers cherry pick data to make their funds look better than they really are.  And how to spot this.  It should make for some worthwhile weekend reading.  Enjoy the rest of it.  After this beautiful day, rain tomorrow! 

	AAII Investor Update THURSDAY, MAY 30, 2019
	Dear Member, “Active managers have been much more successful over the past decade than is commonly realized,” asserts Neuberger Berman. The asset manager backs up this statement with return data from the last 20 years. It’s a bold statement intended to spark interest in actively managed funds, which the company offers. Whether you agree with the statement depends largely on how much you think the data adjustments are justified. The study’s authors purposely did not look at the entire universe of mutual funds. In explaining their rationale, they write, “Instead of comparing the performance of an index against an entire universe of active strategies, it’s more appropriate to reframe the conversation to include only those managers in the top three quartiles of performance and thus eliminate a small cohort of poorly performing funds unlikely to attract significant investment flows.” Based on this, they conclude that 84% of active managers have beaten the S&P 500 index over the past 20 years. Unlike the children from Garrison Keillor’s fictional Lake Wobegon, not all funds are above average. Some are flashes in the pan, doing well over a certain period of time before crashing and eventually disappearing from the fund universe. While Neuberger Berman included funds that were liquidated, by excluding the worst-performing quartile, it is possible that those funds were only included during their good years and excluded during their lousy years. Such a viewpoint assumes that an investor would have enough foresight to predict which funds would have maintained their outperformance AND got out of those same funds before their returns fell to the bottom quartile. Using the full universe of actively managed funds would have resulted in a worse batting average. Continue Reading »