Graham Bentley: What role does luck play in active management?

The principle of mispricing underpins investment

clock • 4 min read

Continuing his series on active management, Graham Bentley considers the part randomness plays in determining fund results and rankings ...

Critics of active management often cite the ‘higher fees for no skill' argument. They have a point. Luck has a significant impact on investment returns - in the short term. Investment is not like a casino, however, where we know the probability of an outcome. The chances of winning in roulette by selecting a single number are 36 to 1 - that is an entirely mechanical and random process, with no skill involved. Furthermore, the house only pays 35 to 1. In the long run, roulette players must lose. In contrast, the so-called ‘sport of kings' is not entirely random. Some horses are better ...

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