Refleksioner om Årets Porteføljemanager 2017s performance


Portfolio Manager of the Year achieves excess returns of 0.83%: Is it something to brag about?

February 2, 2018


  • Denmark’s Portfolio Manager of the Year, Keld Henriksen from Maj Invest, has achieved an annual average outperformance of 0.83% relative to the market over the past 10 years. At first, it doesn’t sound like much, but during the course of a decade Keld has returned 18,000 DKK more to his investors per 100,000 DKK invested (232,001 DKK vs. 213,895 DKK).
  • In Fooled by RandomnessNassim Taleb designs a though experiment, which cements that some have to outperform even if zero funds outperformed. Is Keld a winner based on skills or probability? That question is explored while discussing whether you should park your capital in Maj Invest, a passive index fund or manage your portfolio yourself given the financial landscape we’re currently in.

In mid-November, I published the post Should you follow the experts’ recommendations?which set out to explore the investment literature’s answer to exactly that question. The answer: a resounding no. The literature review was followed up with a study of Sydbank’s buy recommendations over a handful years. Once again we found that the market outperformed the experts’ recommendations. In said post I concluded that randomness more than anything determined whether the experts were able to beat the market.

Some investors, however, are able to consistently beat the market. Top-of-mind are of course Warren Buffett, Charlie Munger, Seth Klarman, Peter Lynch, Howard Marks, Guy Spier and Mohnish Pabrai. Outside this realm of ‘super-investors’, other talented investors hide.

Portfolio Manager of the Year with 0.83% outperformance
Keld Henriksen could be such a talent. He was recently elected Portfolio Manager of the Year 2017 in Denmark. Keld has outperformed in 7 of the latest 10 years (cf. Morningstar’s report). The excess return amounts to 0.83%, since Keld’s fund achieved an annual return of 8.78% (after costs) compared to the market’s 7.95%. A quick Excel-exercise will reveal that 100,000 DKK in Keld’s fund would be worth 232.001 DKK after 10 years; ~18,000 DKK more than the market’s 213,895 DKK. It doesn’t sound epochal, but if this performance is extrapolated into the future, the eight wonder of the world – compound interests – begins to work its magic. 20 years with 0.83% excess return translates into 75,448 DKK per 100,000 DKK invested (548,246 DKK vs. 461,798 DKK).

0.83% doesn’t sound like much, but these small percentage differences do matter in the long run. The question is whether you should park your capital in the hands of Keld & Co?

Skill or luck?
In the post Should you follow the experts’ recommendations?I concluded, as mentioned, that randomness more than anything determined whether the experts were able to beat the market. I’ve since read Nassim Taleb’s book, Fooled by Randomnesswhich cements that attitude. The book centers on how we mistake skills from luck, randomness and probabilities.

In the book, Nassim asks whether we “can we judge the success of people by their raw performance and their personal wealth?” In the eyes of these high net worth individuals who have succeeded, the answer is clear: yes. People who have been successful in their fields, i.e. portfolio managers, will go to great lengths to outline their unique secrets that paved their way to financial riches.

The truth, however, is that they’re most likely fooled by randomness. He substantiates that claim by saying that probabilistically someone has to come out on top. He goes on to ask the reader to imagine a population of 10,000 investment managers, each of whom starts out with $10,000. Each manager’s success for the year is determined by a coin toss. If it comes out heads, she looses her $10,000; tails, she wins $10,000. There’s thus a 50% probability he/she will succeed. At the beginning of year two, we’re down to 5,000 managers with $20,000 each. A year later, 2,500 managers with $40,000 each remain. Another year, 1,250 managers. In year 4, we’re left with 625 managers before finally reaching 313 in year 5. “We have now, simply in a fair game, 313 managers who made money for five years in a row. Out of pure luck.” (p. 153)

I highly doubt that Danish investment funds make decisions based on the outcome of a coin flip. The thought experiment is thought provoking, however, as it indicates that some have to win even if zero funds outperformed. To return to the question of whether or not to park your capital Maj Invest’s coffers one has to consider whether the managers were competent or lucky. In other words, is Keld an outperformer based on skills or probabilities? 

Keld has – before costs – outperformed the market by ~2% on average over the past 10 years, which indeed is admirable; especially since he’s subject certain restrictions. His fund is structured so that he’s only allowed to invest in Danish securities. Since the fund has 15 billion DKK ($2.5 billion) in assets under management, his universe is narrowed down to around 50 “tradeable stocks”. If Keld’s excess return during the past 10 years was in the double-digits – which the ‘super-investors’ mentioned above have achieved – I would surely park a portion of my funds in Maj Invest’s hands. However, in my point of view, a 0.83% outperformance is not enough for me to 1) ascribe Maj Invest’s success to skills, and 2) limit my investment universe to 50 securities in the world’s most expensive index.

Indexing or self-management?
That Denmark’s best fund achieved an excess return of less than 1% indicates two tendencies: 1) Keld’s results are reasonable; 2) the remaining actively managed funds’ returns are not. That a +/- 1% excess return ensures one a place in Hall of Fame tells us that the probability of gaining a few extra percentage points of profits favors the passive index funds due to their low-cost nature, and the fact that so many of the actively managed funds have – obviously – underperformed. This fact is evident when one turns the page of the newspaper. On the very next page after the portrait of Keld, the reader will find the article: “Cheap index funds beat the experts and became best departments in 2017.” These funds simply follow the indexes and their administrative costs are merely 0.5%. As mentioned, this advantage increases the funds’ chances of beating the actively managed funds, and it shows in the results.

You’ve probably figured out how I interpret the article. Unless a fund consistently achieves considerable excess returns, I would rather chose a low-cost index fund. This, however, is not my strategy either. You may remember from Should you follow the experts’ recommendations? that I’m a naïve fool who attempts to pick stocks where ever a bargain seems to surface. I’m hesitant when it comes to index investing because of the – at least compared to historical levels – record-high levels we witness on the financial markets at the moment; that i.e. the S&P500’s Shiller P/E exceeds 30 indicates a long-term return of 3% – not exactly something that makes your jaw drop. If the markets reach more attractive levels, I’ll probably dive into a low-cost index fund. But until we see a larger correction, I’ll continue my hunt for value bargains!


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