Five Myths of Active Portfolio Management

Five Myths of Active Portfolio Management

Journal of Portfolio Management.
2005, Vol. 31, Issue 3, Pages 27-31

Five myths are debunked here. It is not true that: the return investors earn in an actively managed fund measures the skill level of the manager; the average active manager is not skilled and therefore does not add value; if managers are skilled their returns should persist—they should be able to consistently beat the market; in light of 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; and finally, because most active managers’ compensation does not depend on the return they generate, their compensation is not performance–based.