FWB TV and Findependence.TV have just posted our second video, Don’t assume Outperformance is down to Skill. The short (almost 4 minutes) video features Robin Powell interviewing University of Mannheim professor Martin Weber.
Referring to a 2014 academic paper he coauthored, titled Fooled by Randomness: Investor Perception of Fund Manager Skill, Weber explains that retail and even institutional managers often choose money managers on the basis of past investment performance. But he warns investors often confuse skill with luck.
It turns out that it’s very difficult to identify skillful managers in advance. Is it worth it if you can find one? Perhaps if the fees are low enough but generally, Weber says skillful managers turn out to be quite expensive.
Media, Advertising & Industry may have “active” bias
So why do investors so often choose expensive active managers? They tend to be unduly influenced by industry advertising and the media. Weber notes the dilemma that many financial journalists face: low-cost “Passive” indexing tends not to make for interesting copy. And from the industry’s side, practitioners know they can make more money being associated with actively managed products than passive ones.
The first in this video series is immediately below the current one, entitled Who gets the Porsche? Your or your investment firm? Fees Matter. You can find it by clicking on the introductory blog posted on the Hub last week, featuring a Q&A with FWB TV’s Paul Philip (pictured on the right).
The third in the series will likely go up next week.