Investment Skill of Little Use Without Opportunity

The asset management industry puts a lot of focus on identifying skilful managers who can beat the market. But skill alone is not enough,

Matias Möttölä, CFA 1 April, 2015 | 10:54AM
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The asset management industry puts a lot of focus on identifying skilful managers who can beat the market. But skill alone is not enough, as investors were forced to realise in 2014 when most active managers failed to beat their benchmarks. Opportunity must also be present, and in 2014 this was certainly not the case.

"It is almost as if you are a star basketball player, but the coach won’t put you in the game; you are great, but you are not making any difference. Skill can be zero if the opportunities are not there", says Credit Suisse managing director and global market strategist Michael Mauboussin, who recently spoke at Morningstar's European Conference in Amsterdam.

For example, in 2014 large-cap stocks outperformed small caps in most markets as investors piled into large companies paying high and stable dividends. When most of the opportunities are in large caps, it's easy to see how small-cap managers are going to struggle to outperform. In 2014, US large-cap stocks beat US small caps by the largest margin since 1988, according to Mauboussin's calculations. Given that actively-managed funds typically overweight small-cap stocks—because it is difficult to overweight large caps when the common benchmarks are already heavily geared towards large companies—fund performances were dragged down by small-cap allocations compared to their benchmarks.

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Matias Möttölä, CFA

Matias Möttölä, CFA  is a fund analyst and editor of

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