There are 24 horses competing for glory at the Melbourne Cup, the race that stops the nation. If you’re one of the millions of Australians expected to bet hundreds of millions of dollars this year, you probably already know your chance of success is not good.
The odds of picking a winner is about 1/24 (~4%). However, believe it or not, these are still better odds than picking a winning active fund manager to invest your money.
Much like the horse races, there are lots of fund managers trying to win each year. To win as a fund manager you need to outperform your peers and beat the market. Like racing, very few succeed in this pursuit. This leads to lots of money being wasted backing losing funds.
Melbourne Cup punters love looking at the form guide to influence their gambling decision – in other words, how the horse has done in previous events. However, this is actually a lousy indicator as horses rarely back up wins with another victory.
For example, let’s have a look at how the winning horse of the Caulfield Cup (what race fans call a ‘useful predictor’ of who will win the Melbourne Cup) and see how they ended up going in the big race.
|Year||Winning Horse of Caulfield Cup||Melbourne Cup Position|
|2019||Mer De Glace||6th|
Fun fact: The 2014 Caulfield Cup winner came last in the Melbourne Cup!
Incentivise was the winner of the 2021 Caulfield Cup – but how will she fair in tomorrow’s Melbourne Cup being a hot favourite?
A similar pattern appears in the world of picking active fund managers. Investors are often tempted to follow last year’s winner or a fund manager who has had recent success.
It’s usually a poor decision. SPIVAs persistence report highlights that only around 2% of winning fund managers continue to outperform in subsequent years. So, even if you pick a winning fund manager once, the odds of them winning the next year is slim!
By far the most profitable bookmakers in Australia are the wealth managers and brokers who take bets on which fund managers will beat the market. They offer a wide field of ‘runners’ on their investment platforms and take a healthy clip on each investor bet (through platform fees, brokerage, buy/sell costs etc).
Their ‘funds’ are packaged up nicely and have highly qualified jockeys riding the markets up and down. But in the end, there are very few consistent winners.
Don’t look for the needle in the haystack. Just buy the haystack!John Bogle, Founder of Vanguard
You can always find an expert bookie tip on which horse is likely to win, much like brokers have a ‘buy’ rating on a particular stock or fund manager. Only a small handful will be right – and these change all the time.
Our advice to clients is to use the statistics of investing to skew the odds of success back in your favour.
By backing low cost ETFs you become the bookie rather than the punter.