0:37

So as you can see if I look at the right end, the right end is centered on 3.5 so

Â they will generate a sharp ratio a T statistic but

Â the T statistic is roughly the same as a sharp ratio which would be the ratio

Â between an excess return and this term which is measured here by the volatility.

Â In the center, I see that the distribution is centered on zero,

Â so they will have an alpha which is equal to zero.

Â And in the left hand, I can see that the distribution is centered on -2.5.

Â So of course, as an investor, I do not observe those distributions.

Â What I observe is what is in the Panel B.

Â I observe only a mixture of these three populations.

Â And as you can see in the right tail, which corresponds to the positive alphas,

Â I will have a mixture between from manager who will generate a positive alpha,

Â and from manager who will generate a zero alpha.

Â 1:42

Similarly when I look at the left tail, I will have a mixture between, for

Â manager who have an alpha equal to zero so they can, from the middle distribution,

Â and also from manager who will have a negative alpha.

Â So as an investor, of course, what I would like to do is to look at the writing and I

Â will, for example, only consider the firm manager where a sharp ratio above two.

Â When I select those managers, the question that I want to answer is,

Â am I really sure that among all of those firms managers,

Â all of them are really good fund manager and they will generate a positive alpha?

Â And as we can see, in fact,

Â it's very difficult to answer because they will have a mixture between

Â fund manager who have a positive alpha and fund manager who have a zero alpha.

Â So let us look at the results of the methodologies.

Â So this is a slide where I show that to as manager they are, in fact, very,

Â very angry.

Â So why they are angry because if you look at the result,

Â the results are not so nice.

Â As you can see I have roughly 75% of the fund manager who

Â deliver a 0 alpha so they are not able to be the market.

Â I have 25% of the fund manager who will have a negative alpha so

Â that will underperform the markets where they will destroy value,

Â and I have only a very, very tiny proportion of all performers.

Â And as you can see, the proportion is tiny and is equal to 0.6.

Â So now let us have a look at the evolution of that proportion through time.

Â So we saw that the proportion is indeed tiny, it's equal to 0.6, so

Â how was the evolution of that proportion when I look at the window so

Â I will look at the out performer on the window of 5 years.

Â And as you can see the proportion was in fact,

Â quite big at the end of the 80s but now it's very small.

Â We can see that you have a really, really strong decrease of the performance and

Â on the contrary you have an increase in the underperformance.

Â So it means that nowadays it's very,

Â very difficult to find active fund manager who will be able to beat the market.

Â So what I have also done is to update a little bit the time series or the history.

Â And as you can see if we now focus on the figures which are associated to 2012,

Â you can see that in fact the proportion is even lower.

Â We have just seen that the proportion of out-performers is very tiny so

Â now what the potential explanations for that?

Â 4:28

One potential explanation is, in fact, that you have new entrants in the market.

Â So again, if you look at the late 80s, you can see that the number of

Â fund manager who were in the market was only 400.

Â If you look at now what is the number of fund manager available on the market,

Â you will see that they are close to 2,000.

Â So you have really,

Â really a strong increase of the number of firm manager in the market.

Â And when you see the gross you have on the country a strong

Â decline in the average performance delivered by the firm manager and

Â indeed if you look at the average alpha, the average alpha is now very small.

Â So what does it mean?

Â It means that in fact you can have a type of dilution effect so the new entrants,

Â in effect, are not so good for manager, and

Â they have diluted the average performance of the mutual fund industry.

Â So what is another explanation is too many expenses.

Â So in the previous lives what I have done is really to focus on the performance.

Â But after fees, so after you have bid, as an investor,

Â the fees to do the active management.

Â Now, let us look at the figures but before fees, and

Â as you can see here, the proportions are quite different.

Â And indeed, if I look at the proportion of performers,

Â I go from 0.6% to 9.6%.

Â So what does it mean?

Â It means that probably to explain the difference between 0.6% after fees and

Â 9.6% before fees, it means that the fund manager, in fact,

Â raised too much, the fees, and they will simply it on the performance

Â that generates through the fees that are invoiced to you.

Â So if you look over the European data the picture is a little bit more rosy.

Â And indeed if you look at the proportion of fund managers that were able to

Â out perform the market, now we are at 1.8% instead of 0.6%.

Â So what does it mean?

Â Does it mean that you are fund manager are much more capable

Â of managing actively with respect to the US counterpart?

Â In fact, this is not the answer.

Â The answer is that when you look at the European fund manager,

Â they often have a factor loading so a beta with respect to the market which

Â is not equal to 1 but which is much smaller, roughly equal to 0.6.

Â So it means that if you look at European fund manager, often what they do is

Â they deviate from the equity mandate, and they will try to invest, for

Â example, in the bond market in order to outperform the equity market.

Â But this is, in fact, has nothing with respect to the equity market.

Â So what have we learned today?

Â So basically three stuff.

Â The first one is that indeed, the added value of active management is really,

Â really debatable, and this is a really, really controversial question.

Â So this is the first that we learn.

Â The second one is that if you look at passive investment,

Â this has a potential added value.

Â So the that we have learned today is when you buy a mutual fund,

Â pay really a lot of attention to the fee structure.

Â Because often the fee structure will eat the all performance which is generated by

Â the active manager.

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Â