Getting Better All the Time
Friday's column advanced the thesis that today’s fund managers are more skilled than those of the past. Because professional investment managers control an increasingly large percentage of the stock market, it’s tougher than ever to beat the averages. Trades that once would have remained profitable over a long time period now quickly are discovered by the herd of professional managers. That today’s stock mutual funds perform as well as those of 30 years ago, as defined by gross returns versus their benchmarks, testifies to the overall improvement. If managers had not become more skilled, their results would have declined.
Such is the thesis of "Scale and Skill in Active Management" by Pastor, Stambaugh, and Taylor. The argument makes sense. Despite the growth in indexed investing, active professional managers have grown their market share over the past several decades, as investors have migrated from holding stocks directly to investing through funds. One generally thinks of asset bloat as applying to individual funds, which can become too bulky to maneuver successfully, but it certainly can affect the overall activity of investment management as well. More-intelligent, trained people controlling more assets makes for more accurately priced securities.