Star Stock Pickers Harder Than Ever To Find

August 22, 2013

When it comes to active managers who become household names, it seems the bond space might be friendlier to stardom than equities.

Peter Lynch, George Soros and Bill Miller are some of the best active equity fund managers the market has seen, and to a certain degree, they also seem to be a disappearing breed. Active equity managers who become household names on the heels of stellar year-after-year outperformance are harder and harder to find these days.

Lynch is famous as the stock investor who took the Fidelity Magellan Fund from its small beginnings in 1977 to $14 billion in assets by 1990, all the while beating the S&P 500 Index in 11 of those 13 years. Soros, meanwhile, is known in part for running the Quantum Fund for nearly 20 years, which generated an average annual return of more than 30 percent under his watch.

And Legg Mason’s Bill Miller was once coined the best money manager of the 1990s for his performance at the helm of the Legg Mason Capital Management Value Trust. Miller beat the S&P 500 for 15-consecutive years—a record in the mutual fund industry.

These investors have served as inspiration to myriad followers for decades, offering a testament to the benefits of having your portfolio in the right active hands. But in today’s market, the equity fund space seems increasingly devoid of star power, with few household names still making headlines—such as Pimco’s Bill Gross or DoubleLine Capital’s Jeff Gundlach, for instance—being mostly active managers whose turf is the bond market.

Some say part of the reason for that phenomenon is that in today’s world, investors have much more access to information, as well as access to the market as a whole thanks to do-it-yourself platforms, among other things.

The quick proliferation of low-cost passive investing, and exchange-traded funds—which account for about a third of trading volume in U.S. exchanges today—is another factor here, although BAM Alliance’s Director of Investor Education Carl Richards wouldn’t point the finger at indexing as the culprit for the declining staying power of the star manager.

“I don’t think indexing is to blame,” Richards told IndexUniverse in a recent interview. “Reality is to blame; statistics are to blame.”

“Being a star manager is really hard, and while it’s not impossible for someone to outperform the market for a long period of time, it’s highly improbable,” he said. “It makes sense that we don’t have too many star managers. These guys emerge and last for a couple of years, until they don’t anymore.”

Investors are also increasingly discerning when it comes to costs. Active management has a reputation—and a well-deserved one—for costing a pretty penny. As an example, an actively managed U.S. stock mutual fund easily costs investors north of 1 percent in net fees a year, or $100-plus per $10,000 invested. By comparison, an index S&P 500 mutual fund in the market today has a net ratio of up to about 0.60 percent, while the SPDR S&P 500 ETF (NYSEArca: SPY) has a net expense ratio of 0.09 percent, or $9 per $10,000 invested.

That hefty cost structure in exchange for a secret sauce is getting harder to justify in the face of low-cost passive investing, particularly in times when the market is doing well. The issue here is that data show that the costly secret sauce often doesn’t deliver that extra kick.

“Increasing investor awareness is raising the bar as to what investors accept,” iShares’ Head of Fixed Income Strategy Matt Tucker recently told IndexUniverse. “It makes it more difficult for active managers to justify their fees.”

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