Headline Risk Is a Lame Excuse for Active Managers

Active vs Passive
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Active managers need to convince you that they will beat the market going forward because they cannot prove they beat it in the past.

Active managers were quick to explain their underperformance. Mark Lamkin, the CEO and “chief investment strategist” at Lamkin Wealth Management, blamed his underperformance on “headline risk,” noting: “Nine of the last 11 years my active strategies have beaten the market, and I’m underperforming this market. It’s all headline risk.””Headline risk” is the possibility that a negative news story will adversely affect the price of a stock.

I tried to verify Mr. Lamkin’s claim that his active strategies have “beaten the market” in nine of the last eleven years and was unable to do so. His firm does not publish the results of its portfolios on its web page. I called his office and asked for additional information but received no response.

Analyzing the significance of claims that a fund manager or advisor “beat the markets” is not uncomplicated. You need to understand how much risk the manager took and whether the benchmark used for comparison is an appropriate benchmark, comprised of a proportionately weighted mix of stocks and bonds.

Mr. Lamkin’s lament about “headline risk” is troublesome. Unexpected news is a reason for under performance by active managers, but it is not an excuse that active managers should use to explain their inability to “beat the markets.” Tomorrow’s news drives stock prices. Active managers don’t know tomorrow’s news. They can’t anticipate what they don’t know. “Headline risk” is one of many reasons why active managers historically have underperformed the markets and are likely to continue to do so in the future.

According to a mid-year 2011 study by Standard and Poors, Over the past three years, 63.96% of actively managed large-cap funds were outperformed by the S&P 500, 75.07% of mid-cap funds were outperformed by the S&P MidCap 400 and 63.08% of the small-cap funds were outperformed by the S&P SmallCap 600. Passive management trumped actively managed in nearly all major domestic and international stock categories.

Finding an active manager who beats the market is a matter of luck. You have no idea if the active manager presented will beat the market going forward.

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