The High Conviction Approach
A recent Wall Street Journal Headline “Indexes Beat Stock Pickers Even Over 15 Years” appears to make a compelling case for indexes over active investing. Unfortunately, it’s misleading. Here’s why - 80% of mutual funds classified as “actively managed” are in fact, index equivalents that feature active management fees. These funds, on average, hold hundreds of positions and charge more than index funds. As a result, they perform like index funds minus the fee difference. This low conviction fund approach is good for fund managers and harmful for investors.
However, when you remove the low-conviction index fund look a-likes, the results may surprise you. In each fund category, Actively Managed High Conviction Funds consistently outperform, by 1% to 4% annually, after fees over long periods of time. Over 20 years, just a 3% performance increase more than doubles total investment results.
At Selective Wealth Management, we follow a High Conviction Approach. We target ownership in 10-20 businesses, with longer holding durations and invest using the rigorous Selective Process. In short, we seek to buy the World’s Best Businesses at Brilliant prices. We believe that being Selective makes a difference.
 Petajisto, A. (2013). Active Share and Mutual Fund Performance. Financial Analysts Journal, 69(4), 73-93. doi:10.2469/faj.v69.n4.7
The difference of 3% over 20 years
An initial $100,000 investment comparing the difference a consistent 10% average index return vs. a 13% return from a high conviction approach results in
for the high conviction approach vs.
for the index return in only 20 years