The High Conviction Approach

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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[1].  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[1]. 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.

[1] 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

$1,152,309

for the high conviction approach vs.

$672,750

for the index return in only 20 years