Rates of Return from Top Managers

By Brad Thomason, CPA


In the June 14, 2010 issue of Fortune magazine, there is a useful section in which 25 of “The money managers with the best track records give their top stocks.”  I’ll not steal their thunder by giving away their picks, but a good bit of what they say seems plausible.  Pick up a copy if you are not a regular subscriber.

But the aspect of the story that interested me more than the picks was the fact that they gave long-term performance numbers for these folks (24 of them actually; one isn’t a mutual fund manager).  The results were presented in a narrative format, and they were not always consistent from one manager to the next (e.g. one might have his 10-year average given while the next would have her track record since 2002 or 1994, or something like that).  Still, it was a valuable collection of information, and a good way to get some insight into the types of returns that the writers deemed worthy of note.

In order to make the information more comparable I looked up each fund on Morningstar’s site to get the 10-year return for all of them (except for a couple which haven’t been around that long, in which case I used life of the fund).  On a side note, as I worked through the data I couldn’t help but notice in many of the instances where longer track-records were given in the magazine, the averages were higher than the 10-year.  I’ll stop short of suggesting that the writers at Fortuneindulged in a bit of polishing to show the various funds in a stronger light, though it did seem that downward revisions were the norm by the time they made it onto my version of the chart…  Regardless, the data set is interesting.

For a simple analysis, I took the average of all 24, as if we had allocated equal amounts to each one a decade ago.  The average return was 7.19%.  To gain a tiny bit more insight, I took a second average in which I removed the high and low outliers (the low-side number was actually a negative return for the period, and the high-side was in a narrowly focused sector fund which is the type of thing most people would allocate some funds too, but not have a major portion of their portfolio tied up in), and got 6.1%.

You can click here to take a look at the data set.

A few comments:

1.     This is a good time to be doing this type of analysis because the overall market return for the past decade has been more or less flat.  So the returns these folks made were for the most part the degree by which they “beat the market.”  Whether or not a manager beats the market is an important measure, from the standpoint that you have to pay for their services, and you want to know that the returns you are getting are better than what an index fund would have delivered.  The return numbers listed are after fees, so they show a very clear measure of what their investors got in exchange for the fees they paid.
2.    Although comparing the results to the market bogey is important in terms of the decision to pay a manager or not, at the end of the day it really doesn’t matter as much as the return itself.  Beating the market is not the basis on which most financial plans are designed.  Earning a sufficient return is.  So even if your manager trounced the market, and even if you know why the returns weren’t higher, if they fail to meet your goal, your plan is not going to succeed as written.  The returns in the data set represent the best-of-the-best.  If these are the returns that they are getting, how does that compare with the average case?  How does it compare with your expectations and goals?  Are they reasonable, or do you need to go back to the drawing board?
3.    When you are dealing with return levels within this range, seemingly small changes can have a big impact.  Mathematically speaking, changes within this range lead to vastly different results.  For an illustration of this principle, you can click here to look at a chart showing the impact on compounding of various rates of return within what most people would consider a “normal” range.  The point of this chart is to demonstrate the idea that fine tuning which leads to an annual pick-up of even 1 or 1 ½ points can make a big difference over the long-term.

Knowing what kinds of returns the pros are getting helps to give us realistic expectations about what types of returns are available, at least from conventional buy-and-hold strategies.  They also give us some insight as to who is earning their keep.  But at the end of the day, if you need higher return levels than those demonstrated by the top pros, you might want to consider reviewing how you have your assets allocated, as well as the efficiency with which you manage your plan.  A small adjustment or two might be able to make a big difference.

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