Challenges Involved in the Selection of Investment Managers
The U.S. mutual fund industry comprises a vast universe of investment strategies that reflect a diverse range of philosophies and approaches. In pursuit of superior performance, some managers forecast macroeconomic trends in an attempt to identify which sectors are likely to outperform in the prevailing stage of the business cycle, while others attempt to identify individual companies that are perceived to be undervalued.
The irony is that for most investors, professional or individual, most of this activity will not yield returns superior to that of an index. The data shows that few active investment managers have consistently delivered benchmark-beating returns over time. And, although it is easy to find managers with impressive track records, past outperformance is rarely a reliable indicator of future success.
This paper discusses some of the challenges involved in the selection of investment managers.