Picking Active Managers II

In their paper, “Is Manager Selection Worth the Effort for Financial Advisors?,” authors, John West, CFA, and Trevor Schuesler, CFA, conclude “manager selection fails to produce positive excess returns, on average” and “trend-chasing behavior leads to poor buy and sell decisions.” They find “many advisors put their clients on the “hamster wheel” of manager selection, continuously replacing poor performers with good performers. The evidence makes it pretty clear we shouldn’t use historical performance as our primary manager selection criteria.” They conclude, “Nonetheless, the literature suggests that financial advisors shouldn’t expect, nor communicate to clients an expectation of, market-beating results via manager selection, at least not with the current (sometimes overwhelming) investor bias of making buy and sell decisions based on performance metrics.” They state, “If the expectation is to produce positive alpha, financial advisors and their clients are likely to be disappointed.”