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The modern investor may feel about their fund manager much as Napoleon felt about his generals: plenty of them are clever, “just give me a lucky one”.
The distinction between skill and luck is of more consequence when grapeshot is whizzing overhead than when trying to beat an index. But the difficulty of distinguishing the two is at the heart of money management, and the distortions it creates in the market.
The usual approach to manager selection is in focus this week, as it emerged that billionaire George Soros has pulled $500m from a bond strategy run by Bill Gross, just a year after investing.
Mr Gross built a rock-solid record in 43 years of running Pimco, but his performance in the year since he quit and joined Janus has been miserable.
Has he lost his skills? Did his performance owe more to the Pimco working environment? Is he distracted by his $200m lawsuit against the company he founded? Even worse, perhaps his past gains were really about being leveraged in an era of falling yields, now (maybe) over.
Investors should pay attention to such issues, as they should watch for strategy drift, disruptive divorces and managers spending more time with their golf handicap.
But it’s just as likely that Mr Gross was unlucky with the odds.
As in poker, luck matters more for investing in the short run than skill. In the long run, playing the odds gives a smarter poker player an edge — but even the best can have a run of bad luck. A good investment strategy can be out of favour for years, driving managers out of business.
Because distinguishing skill from luck is so hard, investors tend to be willing to believe the worst. After all, there are a lot of chancers hoping to get lucky and make fat fees as their funds swell; there are twice as many mutual funds as actively-traded shares in the US alone, even without mentioning the natural home of the charlatan, the hedge fund.
Mr Gross lost 2 per cent in the past year, disappointing for an unconstrained bond fund aiming to beat cash. After such a poor start at Janus, it is easy to see why clients might cash out. But those who saw him as a genius a year ago should think carefully about why they changed their minds. Hoping to get lucky elsewhere is not enough.