- Like the elusive Wolpertinger of Bavarian folklore, active managers who are successful over the long term tend to be mythical creatures.
- Academics have been evaluating sightings of successful active managers for decades. There is little evidence that such managers exist in large numbers.
- Just as few people survive encounters with Wolpertingers, many investors do not survive encounters with the high-cost active manager.
As many of you know, I’m on the road frequently. But, one of the things I like most about traveling is learning about the folklore of the areas that I visit. Recently, I had the opportunity to visit southern Germany where I learned about the Wolpertinger.
Not familiar with a Wolpertinger?
According to legend, the Wolpertinger is a composite creature made up of many animals. For example, a Wolpertinger may have a duck’s webbed feet combined with a groundhog’s body and a pheasant’s wings. How’s that for a combination? Apparently, Wolpertingers often have horns as well! Wolpertingers are frequently anthropomorphized with accoutrements such as pipes and fishing rods (see photo below). In the end, there is an almost endless variety of Wolpertingers, but each type shares some common traits:
1. Wolpertingers are very rarely seen in person and they’re dangerous. If you do see one up close, according to legend you may have only a 50 percent chance of surviving the encounter.
2. There is scant proof that Wolpertingers exist. There are no known photos of Wolpertingers. Nor are there footprints, skeletons or artifacts of any sort. Yet people are highly confident that Wolpertingers are real.
While visiting the Hunting and Fishing Museum in Munich, I was fortunate enough to see a Wolpertinger survivor’s artistic rendering of the elusive creature he had seen (see photo below).
What Wolpertingers and active managers have in common
It took me a while to recover my composure, but after some reflection, it occurred to me that the Wolpertinger is a lot like the so-called successful active investment manager.
As with tales of Wolpertingers, legends about successful active managers abound. You hear about the active manager’s exploits all the time at cocktail parties, at the family Thanksgiving table, on the sidelines of your child’s or grandchild’s sporting events, and even while golfing. These legendary active managers are said to have achieved great investment performance, while at the same taking on minimal risk. They’re also said to have an uncanny ability to predict the future.
Sounds impressive, right? But, like the Wolpertinger, these legendary active managers are rarely seen in person, and those that are can be extremely dangerous to your portfolio. They are dangerous because the can ensnare you with their high costs and because their performance is often disappointing. Just like people who come across Wolpertingers, many portfolios don’t survive their encounters with legendary active managers.
In addition, there is scant proof that consistently good active managers really exist–even though they are touted by many, including the financial media. Academics have been evaluating sightings of active managers for decades and there is still little evidence to prove that they exist in the numbers that would be predicted by random chance. Further, the number of active managers that can actually cover their costs is few and far between. Plus, it’s impossible to predict which ones can do so consistently.
Other than that active management is great for investors!
The scientific evidence is clear for both the Wolpertinger and the successful active manager. They probably don’t exist. At least in the case of the successful active manager.
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