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The Futility of Stock-Picking in Two Charts

(Bloomberg Gadfly) -- The return of volatility has revived fund managers' hopes that stock-picking funds will regain their mojo and start outperforming the index-tracking gang.

Figures published by S&P Global Inc. this week suggest that, in Europe at least, investors should be wary of buying that hype.

The Futility of Stock-Picking in Two Charts

The average returns of active European funds, net of fees, are lackluster at best over a one-year timeline. Over longer time periods, they look disastrous: investors would have been better off buying a tracker instead of three-quarters of funds.

Of the 23 active fund categories S&P analyses in Europe, just 9 outperformed their relevant benchmarks over 10 years, when measured by average asset-weighted returns. Even within those winning categories, however, less than a third managed to outperform, showing that "a minority of funds were responsible for each group's success," S&P says.

In other words, even if an investor selected the correct category in which to entrust their money, more than two-thirds of the time they'd have chosen the wrong manager anyway.

And that's for funds investing in their local markets. For Europe-based asset managers dabbling in global equities and emerging markets, the results are truly horrible.

The Futility of Stock-Picking in Two Charts

Little wonder the European market for exchange-traded funds, the bulk of which are passive products, has grown so fast. According to figures compiled by research firm ETFGI, it expanded more than 40 percent last year, and by a further 9 percent in the first two months of this year. The evidence suggests investors would be better off taking that low-cost route to building their nest eggs than gambling on the alleged stock-picking skills of active managers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To contact the author of this story: Mark Gilbert in London at magilbert@bloomberg.net.

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