Hyperactive management is a process where three things happen (sometimes all three at the same time).
- STOCK PICKING. The hired manager, mutual fund company, or large financial institution trys to buy and sell individual stocks within the mutual fund in an attempt to provide superior returns and beat the market.
- MARKET TIMING. The hired fund manager or money manager gets in and out of stocks when they think the market is going to change directions. In effect, what they are doing is trying to predict the markets ups and downs.
- TRACK RECORD. Evaluating the past performance of a fund manager or money manager. A review of the past ten, fifteen or even twenty years is used as a tool with the hope of superior performance in the future.
These three types of hyperactive management are extremely suspect and they leave the investor with many problems, because all the studies show that those forms of investing are much more in the line of speculation, and not true prudent investing.
There is zero correlation between a money manager’s ability to pick stocks, time the market or to repeat their lucky past performance, with their ability to do so in the future.
Even though these hyperactive funds and managers have sophisticated product names, there is no way they can tell you what the future performance of their investments will be. Many plan sponsors and participants have felt the sting and pain of this type of management when they’ve trusted many of the large mutual fund companies and large financial institutions who led them to believe that these forms of investing were prudent, and could actually help them maximize their wealth on a consistent and predictable basis.
Research has proven time and again that, managers (no matter how great their track record was in the past) consistently and predictably underperform the market going forward into the future. Why? It is often the result of high internal costs.