How we select fund managers to invest your wealth

Key Points:

  • In the U.S, over 83% of active fund managers underperformed their benchmark over a 15 year period.
  • Funds that perform in the top 25% over 1 to 5 year periods have a low probability of remaining in the top quartile over the subsequent 1 to 5 year period.  A reminder that past performance guarantees nothing about future performance.
  • In contrast, our diversified and evidence based investment approach, as implemented through fund managers including U.S based Dimensional[1], has produced a strong track record and persistently beaten their respective benchmarks and delivered top quartile results.

Some of our clients have had previous experiences with financial advisers where they were always “busy” with their portfolio – changing stocks or fund managers on a regular basis.  The experience they now have at Stewart Partners is quite the opposite – whilst portfolios are regularly rebalanced back to appropriate target asset allocations tailored to each client, rather than market forecasters/speculators opinions.

Some clients ask why we don't rotate funds in their portfolio more often?  Our answer is our investment philosophy.  You can read the key principles of our approach here:  A Better Investment Experience.

So having an investment philosophy is great you say – but what is the ‘evidence’ underpinning your ‘evidence-based’ approach?

We test our investment methodology in all markets, but if you selected only one to focus on, the U.S market is the best due to its size and depth.  The U.S market comprises 54% of the global market capitalisation.

For 16 years S&P Dow Jones has published a report called the S&P Indices vs Active report, or SPIVA.  This report has become the de facto scorekeeper for comparing traditionally actively managed funds (managers who stock pick and market time based upon their belief that they can outguess the collective wisdom of markets[2]) vs passive investing, such as buying an index fund that simply tracks the S&P 500.  A SPIVA report is also published for Australia, with the most recent results discussed here: The Journey of Owning Shares

Over the past 16 years, the release of each SPIVA report has coincided with passionate arguments from both the active and passive camps when headline numbers deviated from their beliefs.

SPIVA recently released its 2017 year end report.  Whilst the results over 1 year were mixed, as the time horizon was extended, the results became compelling, as the table below demonstrates:


Over the 15-year investment horizon, 92% of large-cap managers, 95% of mid-cap managers, and 96% of small-cap managers failed to outperform their benchmark index on a relative basis (see red highlight in table).  Put another way, over the last 15 years from 2002 to 2017 in the U.S, only one in 13 large-cap managers, only one in 19 mid-cap managers, and one in 23 small-cap managers were able to outperform their benchmark index.

So it is possible for some active fund managers to “beat the market” over various time horizons, although there’s no guarantee that they will continue to do so in the future. And the percentage of active managers who do beat the market is usually pretty small – fewer than 8% in most of the cases over the last 15 years; and they generally do not sustain that performance in the future.

For many investors, the ability to invest in low-cost, passive funds and outperform 95% of high-fee, highly paid, active fund managers seems like a no-brainer, especially considering it requires no traditional research or time trying to find the active managers who beat the market in the past and may do so in the future.

We believe that index funds certainly have a place in client portfolios, but through the use of financial science we also know that specific factors drive investment returns.  By targeting these factors we can increase the expected return of portfolios above the index.

The Norwegian Sovereign Wealth Fund – the largest in the world managing over US$1 trillion and holding 1.3% of all global equities – targets the same factors that we do for our clients[3].

Our recent article The Journey of Owning Shares discusses some of these factors.  Based on our global due diligence in conjunction with the other members of the Global Association of Independent Advisors [GAIA] (of whom we are a founding member) for fund managers who employ objective, systematic processes to manage their funds, Dimensional remains a consistent and low cost manager to practically target and capture these factors and then manage various strategies for our clients.

Dimensional recently published a graph illustrating its own 15 year experience to the end of 2017.  For its 13 largest US equity funds, the graph below shows:

  • How Dimensional performed relative to its benchmark (white dot)
  • How Dimensional performed relative to its competitors (black line)
  • How many funds actually survived the 15 year period (blue shaded column)

The results conclusively support that our 'evidence-based approach' can deliver strong returns over the longer term. In all instances Dimensional beat its benchmark, and placed in the top quartile for 12 of its 13 funds.  But it's important to note that whilst Dimensional is typically included in the core component of our recommended portfolios, we have other managers on our Approved Product List that we do include in client portfolios as appropriate.  And we and all members of GAIA continue to look for other fund managers who adopt repeatable and systematic processes for delivering above market returns for our clients.

But what about those investors that are lucky enough to pick a high performing fund manager whose value proposition is that they have the talent and skills to identify individual stocks that will be 'the next big thing'? 

The Economist [4] recently looked at the best-performing 25% of American equity funds in the 12 months to 31 March 2013, and then their performance over the subsequent four years.  The results are shown in the graph below:


In the 12 months subsequent to March 2013, only 25.6% of those funds stayed in the top quartile.  This is no better than chance.  In the subsequent 12 month periods, this elite bunch is winnowed down to 4.1%, 0.5% and 0.3% - all figures that are worse than chance would predict.  Similar results applied if you had picked the best-performing 50% of equity funds – those in the upper half of the charts failed to stay there.

SPIVA also ran a report analysing funds with top-quartile performance over the 5 years to March 2012.  What proportion of those funds were still in the top quartile over the subsequent 5 years to March 2017? The answer is just 22.4% - again worse than chance would suggest.  Indeed, 27.6% of the star funds in the 5 years to March 2012 were in the worst-performing quartile in the 5 years to March 2017.  Investors using past performance as a guide had a higher probability of picking a dud than a winner.

So what conclusions should you take away as an investor?

  1. Working  with an adviser who uses an evidence based investment approach rather than one which relies on outsmarting everyone else is by far the best strategy.  This avenue lets you spend more time pursuing things you enjoy instead of wasting energy trying to ‘figure out the market’, and whilst doing this your returns won’t suffer and your anxiety will decrease.
  2. You can ignore the financial media and ‘experts’ because most of them are wrong most of the time.  And when they are right, it’s most likely due to luck rather than skill.
  3. When investing, 'simple' traditionally trumps 'complex'.  You don’t need a range of fund managers in your portfolio to breed success – you just need to focus on managers who can implement a systematic, evidence-based investment approach.  The data irrefutably shows that such an approach gives you the best chance of having a superior investment experience.


[1] Dimensional receives financial data for more than 200,000 securities.  The average number of holdings for each equity fund is 2,000.  There are 420,000 equity positions across portfolios with 47 different countries represented.  In addition there are 12,900 fixed interest/bond positions across portfolios.

[2] It's worth noting that each day there are 82 million transactions and USD$478B of assets transacted in global equity markets.

[3] Source: ‘Evaluation of Active Management of the Norwegian Government Pension Fund’ 2009 by Ang, Goetzmann Schaefer


Author: Rick Walker


Note re Dimensional Dimensional 15 year experience graph, Dimensional placement is the Morningstar 15-Year Total Return Absolute Category Rank sourced from Morningstar. Number of funds starting the period is the number of share classes, within the respective Morningstar Category, with return histories as of the start of the 15-year period ending in December 31, 2017. The Morningstar category data is provided at the individual fund share class level. Multiple share classes of a fund typically have a common portfolio but impose different expense structures. Proportion of Surviving Funds Placing Ahead (Behind) of Dimensional is the proportion of ranked funds with a higher (lower) Morningstar 15-Year Total Return Absolute Category Rank than the corresponding Dimensional fund. The Average Index Fund Placement is the average, as determined by Dimensional, of the Morningstar 15-Year Total Return Absolute Category Rank for index funds within the respective Morningstar category as of December 31, 2017. All funds are US-domiciled. Funds may have experienced negative performance over the time period. Past performance is no guarantee of future results. Visit for standardized performance
information for Dimensional’s funds. See “Relative Performance for Standardized Periods” in the appendix for further information.


Rick Walker