Investors might do just as well with a random selection of stocks in the Standard & Poor’s 500 Index as they would with fund managers’ favorite shares, according to a new study.
This chart displays the Morningstar Ultimate Stock-Pickers Index, the basis for the research. The index is drawn from holdings reported by 22 U.S. mutual funds and four insurance companies: Alleghany Corp., Berkshire Hathaway Inc., Fairfax Financial Holdings Ltd. and Markel Corp.
Morningstar’s index has produced a lower total return than the S&P 500 since debuting on Jan. 31, 2012, as depicted in the chart. The gap ended last week at 3.9 percentage points, based on the stock pickers’ return of 53.6 percent, which reflects dividends as well as price changes.
“There is no significant evidence of superior stock-picking ability for the market experts,” Stefaan Pauwels, a researcher at Belgium’s Ghent University, wrote in the study. While the performance of some of their shares pointed in that direction, he wrote, most of the gap “is based on luck.”
Pauwels judged the managers’ level of skill by comparing returns on the Morningstar index with average returns on 1,000 groups of stocks, generated randomly on a quarterly basis. Each group consisted of 10 companies from the S&P 500. The research covered December 2010 through last September.
“Indexing is preferred for most investors” rather than active management, he wrote. The study was published on June 18 and is available on the Social Science Research Network, an online repository.
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