Mission impossible: beat the index

Posted in :

Reading Time: 2 minutes

For the mutual fund, besides being the leader in its category each year, one key performance measure is to beat the bench market index. For instance, if a fund is invested in emerging markets, one key bench mark is MSCI emerging market index (EFM, an ETF tracks this index). For reference, the index is up 33.44% from Dec 21 2006 to Dec 20 2007.

But, beating the index is very hard. Consider Bill Miller, the legendary fund manager of Legg Mason Value Trust, and he is going to underperform the market second year in a row after beating S&P continously for 15 years. Here is a link to the fund details. From the portfolio, Bill hit a home run with Amazon, but he also had dogs like Sprint, Yahoo and to a lesser extent, eBay. The following is Performance of Monthly and Average Annual Total Returns (as of 11/30/07, source: Legg Mason site).

1 Month -6.84%
3 Month -2.70%
Year-to-Date -3.07%
1 Year -1.77%
3 Year 5.38%
5 Year 10.95%
10 Year 9.38%
Inception (12/1/94) 15.89%

I am thinking, this “beat index metality” may lead many mutual fund managers (supposely should take a slightly “long term” view) chase short term gain, and eventually got the opposite to what they wanted: lose to index. So don’t try too hard. Have some coffee (or coke), read the WSJ, and enjoy life…like Buffett did. Is this also another way of saying “ignore Mr. Market”?

I understand mutual fund managers are not as lucky as Buffett in the sense they have to show the yearly performance (and in China, people are tracking monthly or even weekly performance), and if the investors are not satisfied with the results, they can withdraw (redeem).That means, in some extreme cases, the fund managers have to cut loss although they know some stocks will bound back. Buffett also need to face the shareholder too, because he is luckier because he is the majority shareholder; and most other shareholders have a longer term view than the shareholders of most other public companies.

So, do you want to be a fund manager, if oppertunity arises?

%d bloggers like this: