You will be able to explain what active fund studies show and where a retail investor might still have an advantage.
Marcus's comparison in lesson 12.6, Benchmark your results against a managed fund, like for like, raised a bigger question. If professional fund managers, with research teams and data he'll never have, mostly fail to beat their benchmarks, what chance does an operations manager with a spreadsheet have? The honest answer has two parts. On average, very little. In a few specific places, more than a fund manager, for reasons that have nothing to do with being cleverer.
This lesson covers what the evidence on active funds shows, the bias that distorts most of it, and where a retail investor's advantages really lie.
Lesson 1.7, Read a fund's performance table without being misled, showed how survivorship works with ten made-up funds. Funds that do badly are often closed or merged into better ones, and their records vanish. A table of the funds that exist today shows only the survivors, so the average looks better than the average fund investors actually owned.
The effect reaches further than fund tables. Stories of successful stock pickers are survivors too: you hear from the friend whose picks doubled, not from the three who quietly went back to index funds after a bad run. Studies or backtests built from today's list of companies leave out the ones that went bankrupt or were delisted, as lesson 10.6, Data mining, overfitting and transaction costs, warned. Any claim about how well active investing works needs to answer one question first: does it count the ones that didn't make it?
The most widely used evidence on active funds comes from S&P Dow Jones Indices, which publishes SPIVA scorecards, short for S&P Indices Versus Active. Each scorecard compares actively managed funds in a market with the benchmark for their category, over periods from one year to fifteen or twenty. Unit trusts, robo-advisors and managed money compared explains how to read one in lesson 6.2, What the SPIVA reports measure and show.
Two features matter here. The scorecards count funds that closed or merged during each period, so survivorship doesn't flatter the result. And they measure each fund against the index for its own category, so a small-company fund isn't judged against a large-company index.
Across most categories and most long periods, the scorecards have found that most active funds trailed their benchmarks, and the longer the period, the more consistent that finding has tended to be. The exact share varies by region, category and edition, which is why this lesson quotes none of the numbers. Read the latest scorecard yourself rather than a figure from an old article. S&P Dow Jones Indices also publishes persistence scorecards, which check whether funds that did well in one period stayed near the top in the next. That's the evidence that matters most if you plan to pick a manager, or yourself, on past results.
Lesson 6.1 of the same course, Why active funds as a group trail the market after costs, gives the arithmetic underneath. Before costs, active investors as a group hold the market, so they earn its return on average. After costs, they must trail it on average. That applies to individual stock pickers as much as to funds.
None of this means every advantage belongs to the professionals. A person running their own money has a few structural edges, and they come from size and freedom rather than skill.
The first is small companies. Larkspur's free float, from lesson 5.4, Index construction and what inclusion does to a stock, is 135 million shares, worth about S$216 million at S$1.60, and it trades about 0.6 million shares a day, roughly S$960,000. A made-up fund of S$1 billion that wanted Larkspur to be just 2% of its portfolio would need S$20 million of shares, about 21 days of the stock's entire trading. Getting in would push the price up, and getting out in a hurry would be worse. Many funds simply can't own companies like Larkspur in a size that matters to them. Marcus can buy S$8,000 of it in an afternoon.
The second is time. A fund manager is judged quarterly and loses clients after a bad year, so holding a cheap, unloved stock for three years while it recovers is a career risk. An individual has no clients and can wait as long as the thesis holds.
The third is freedom from a benchmark. A professional who strays far from the index and is wrong may lose their job, so many hold close to it. An individual can hold a concentrated, unusual portfolio if their rules allow it.
Against those, a retail investor lacks almost everything else. Professionals get information faster, meet management, pay lower trading costs, and spend full working days on research that Marcus fits into evenings. Large companies covered by dozens of analysts are where those advantages count most, and where an individual has the least chance of knowing something the price doesn't. An investor's own behaviour can turn the time edge into a weakness, too, by trading too often or selling in a panic.
So the evidence points the satellite in a particular direction. If you pick stocks at all, the places where your advantages are real are small, thinly traded companies, held for years, in a portfolio you don't have to justify to anyone. The places where they aren't are large, heavily researched companies traded often. Marcus noted, uncomfortably, that his chip designer, a widely followed US company, sat squarely in the second group.
For the activity, you'll download the latest SPIVA scorecard for one region from S&P Dow Jones Indices, find the category closest to the stocks in your satellite, and read across to the longest period.
Read the latest SPIVA scorecard for one region and write two sentences on what it means for your satellite.
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