Two professors at the Stanford University business school recently had the idea to try to quantify - in terms of real dollars - what a good mutual fund manager brings to the table. They looked at the universe of actively managed funds as measured against their benchmarks. The bottom line: The average manager overseeing an actively managed fund brings in an average of an additional $140,000 a month, or more than $2 million a year.
The research found that this was a statistically significant, repeatable skill. Truly good fund managers really do earn their keep. On the other hand, they are in the minority. Only 43 percent of all fund managers, they found, added positive value to their funds. The good ones, then, have much more of an effect on their returns than the poor ones do.
The lesson here should be clear: The best fund managers provide an awful lot of value for their investors. The research shows that among the top 10 percent of all fund managers, even the lowest-ranked was earning an extra $750,000 a month for his or her clients. With careful selection processes, actively managed funds can be a great boon for the individual investor.
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