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The role of luck...
Forbes.com - Magazine Article
Mutual fund advertisements are far too effective. Fund companies often promote actively managed funds that have generated high returns, and investors flock to such funds. Unfortunately for these investors, there is little relationship between high past returns and high future returns.
Why doesn't strong past performance continue? The primary reason is that luck is a major factor in fund returns, and luck generally does not persist. Investors tend to overlook the role of luck in fund returns. There are thousands of actively managed equity funds, so even if all fund managers were randomly picking their portfolios by throwing darts at a stock page, a large number of funds would still soundly beat market averages.
In a new study finance professors Eugene Fama of the University of Chicago Booth School of Business and Kenneth French at Dartmouth's Tuck School of Business quantify the role of luck in fund returns. They find that the strong returns of actively managed funds are almost always due to luck, not the stock-picking skill of fund managers. The study will be published in the Journal of Finance.
Mutual fund advertisements are far too effective. Fund companies often promote actively managed funds that have generated high returns, and investors flock to such funds. Unfortunately for these investors, there is little relationship between high past returns and high future returns.
Why doesn't strong past performance continue? The primary reason is that luck is a major factor in fund returns, and luck generally does not persist. Investors tend to overlook the role of luck in fund returns. There are thousands of actively managed equity funds, so even if all fund managers were randomly picking their portfolios by throwing darts at a stock page, a large number of funds would still soundly beat market averages.
In a new study finance professors Eugene Fama of the University of Chicago Booth School of Business and Kenneth French at Dartmouth's Tuck School of Business quantify the role of luck in fund returns. They find that the strong returns of actively managed funds are almost always due to luck, not the stock-picking skill of fund managers. The study will be published in the Journal of Finance.
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