Each year millions of Australians place their bets on the Melbourne Cup, a race with 24 competing horses. The thrill is palpable, yet the odds of winning aren’t in your favour. In fact, the probability of picking a winner at random is about 1 in 24, or roughly 4% – still better than the odds of choosing an active fund manager who has consistently beaten the market after fees over five years.
Much like a horse race, investing with active fund managers is a gamble. Fund managers compete to beat the market, but very few succeed. Investors often pour money into funds based on a manager’s past performance, only to be disappointed. Much like looking at a form guide for the Cup, past success doesn’t reliably predict future wins.
Take for example, the Caulfield Cup as a predictor of Melbourne Cup success. Many racing fans believe a win in the Caulfield Cup hints at potential Melbourne Cup performance, but the data tells a different story:
| Year | Caulfield Cup Winner | Melbourne Cup Position |
| 2024 | Duke De Sessa | TBC |
| 2023 | Without A Fight | 1st |
| 2022 | Durston | Did Not Run |
| 2021 | Incentivise | 2nd |
| 2020 | Verry Elleegant | 7th |
| 2019 | Mer De Glace | 6th |
| 2018 | Best Solution | 8th |
| 2017 | Boom Time | 15th |
| 2016 | Jameka | 15th |
In 2023 the winning horse “Without A Fight” became the only horse to win both the Melbourne and Caulfield Cups in the same year since 2001.
Investing in active funds: a gamble
Investors like horse punters, are tempted to back a winner from last year, believing recent success will continue. But according to SPIVA’s persistence report, only 2% of top-quartile funds from 2021 remained in the top quartile for each of the next two years – far lower than expected under random chance. Similarly, S&P research reveals that 80% to 95% of active funds underperform the index over time.
In this high-stakes industry, the most consistent winners are often not the investors, but the fund managers and stock brokers. These intermediaries earn through management fees, performance fees, platform fees, brokerage, and buy/sell costs while offering a vast range of “investment runners,” each managed by a highly qualified “jockey.” Yet, despite all the expertise, the odds of finding a consistent winner among fund managers remain slim. Over the last five years our research shows that only 2% of large-cap global active managers beat an equivalent ETF after fees. That’s a slim 1 in 50 chance.
In other words, betting on a random Melbourne Cup horse offers better odds than finding a global fund manager who has outperformed a simple ETF over five years.
Perhaps active fund managers should come with a “gamble responsibly” warning as well!
A smarter investment approach
There’s always an expert with a “hot tip” on a horse – or a fund manager. But just as only a handful of these tips pay off, the same is true in investing. Our advice? Use the mathematics of the market to tilt the odds in your favour by backing low-cost ETFs to become the bookie rather than the punter.
This strategy has helped the Stockspot portfolios deliver better returns than most active diversified funds, with annual returns ranging from 5.8% to 8.7% over the past 10 years and from 16.2% to 21.9% in the past year as of September 30, 2024.
