Conventional wisdom has it that active fund managers are best able to add value in inefficient markets, where uncovering a gem of information unknown to the madding crowd is a more realistic proposition.
In equity markets, this generally translates into a view that active managers in small-cap stocks and emerging markets are best placed to earn their fees.
"Small-caps are a less efficient market where there is an opportunity to find value where the market has not discovered it. I expect the same thing to hold true for emerging markets," says Julia Hobart, director of the asset management practice at Mercer Oliver Wyman, a consultancy.
However, recent data from Standard & Poor's (S&P) has called these assumptions into question. The data provider found that while 29 per cent of US large-cap managers have outperformed the S&P 500 over the past five years, only 19.5 per cent of small-cap fund managers have beaten the S&P SmallCap 600.
The picture for small-cap managers investing outside of the US is a little brighter, with 23.3 per cent of them outpacing the S&P/Citigroup EMI World Ex-US over the past five years, compared to the 21.8 per cent of their large-cap peers who have beaten the S&P/Citigroup PMI World ex-US. But even here the picture appears to be deteriorating, with far fewer small-cap than blue-chip managers beating their respective index so far this year.
Active emerging market fund managers appear to be faring worse still, with just 10.4 per cent of them outstripping the S&P/IFCI Composite over the past five years, the worst record of any sector monitored by S&P.
Statistics can, of course, be used and abused to prove anything. But Standard & Poor's is itself exercised enough by the data to warn that investors should be wary of swallowing one or two convenient "myths".
"I think these figures should force a rethink of the traditional belief that in inefficient asset classes asset managers can add extra value and justify extra expenses," says Srikant Dash, index strategist at S&P. "The law of active management [that charges mean most funds underperform their index] works irrespective of the market."
Mr Dash also disputes the widely held view that active managers can outperform in a down market, given their freedom to hold some cash, pointing out that 72 per cent of US small-cap managers underperformed the S&P 600 in the three years to 2002, the worst three-year run for the US equity market since the 1940s.
"It's a myth that has been established in the industry for some time," says Mr Dash. "I don't think the industry is deliberately misleading anyone, it's just a myth that works in the current business model and there is no incentive to dispel that myth."
It is among private investors that the myths of which Mr Dash speaks are most prevalent, and potentially damaging.
