Active Delusions

As real investors (as opposed to speculators) have started realizing that actively managed mutual funds cannot, in the aggregate, beat the market - because the math just doesn’t work, those who make a living picking stocks and timing the market are grasping for a lifeline.

In a recent Wall Street Journal interview Brian Frank, manager of the tiny $27 million Frank Value Investors Fund (seriously, look it up, FRNKX) becomes the latest active mutual fund manager trying to justify his existence by continuing to insist that he is somehow prescient. With half his portfolio in cash, he excuses his latest terrible performance by stating that while he knows the market is going to crash (and he’s right - someday it will) but that “we never hit it perfectly.”

Here is my response to this latest active manager’s whiny lament:

“I Hate to burst your bubble, Mr. Frank, but you’ve been charging people one and a half percent per year to achieve mediocrity (barely). Over the past decade, you have slightly unperformed your benchmark - the S&P 500 - while providing your investors with a frighteningly focused portfolio of just 15 stock (and one of those is someone else’s fund, Berkshire Hathaway). Even worse, your fund has been 20% more volatile than the S&P 500 over that same period. In other words, you charge more, take more risk, and still manage to underperform your benchmark.

Real investors seek out risk with demonstrable historical rewards. That’s precisely the opposite of what yours and most actively managed funds have historically provided.”

Once again, an actively managed fund manager manages to prove our contention that it is almost impossible to beat the market over an extended period. The fund's brief period of stellar performance – prior to 2008 – is more likely explained by sheer randomness than prognosticative skill.