The Peter Principle suggests professionals rise to the level of their incompetence. Each promotion stems from success in their current job – until finally, they’re promoted beyond their ability, and they’re stuck. It would seem 2014 was the Peter Principle writ large for active managers.



Actively managed mutual funds had a terrible year. Josh Brown posted a piece on the general under-performance of these funds compared to their benchmarks in 2014 and highlighted research from GMO by Neil Constable and Matt Kandar. Fewer than 20% exceeded their benchmarks in 2014. They, however, are not alone.

Equity hedge fund managers have also seen measures of their skill decline. But wait, they’re supposedly the smart money. According to Symmetric.io, however, fewer than 20% of these managers registered positive stock picking skill over the past year – StockAlpha. That’s right in line with actively managed mutual funds and indicative of an increasingly rare commodity – investor skill.

Symmetric started with a sample of more than one thousand funds. We analyzed their public portfolios according to each manager’s ability to pick stocks that outperformed their corresponding sectors. For example, if a manager picked Apple, did it perform better than the tech sector? If they picked Nike, did it outperform the consumer discretionary sector? Next, do they do so consistently, or is it just a fluke, perhaps. The methodology controls for net exposure, beta and leverage. It focuses on what matters to an active manager – their ability to pick winning stocks. Here are the top five of the top twenty.

The results for the broader sample, however, were disappointing. It’s not that there aren’t good stock pickers. They’re out there, and some of them are great, but they’re surrounded by those with lesser ability. The chart below illustrates the distribution of a manager’s ability to pick stocks that outperform their corresponding sector – StockAlpha. Over the past three years, 50% had it. Over the past one year, 20% have it. This illustration overlays the distribution for for the prior year and prior three years for the current period.

One class of managers did stand out – Activists. Activist investors were well represented in the top twenty, and though they’re not sector-specialists, per-se, they were also among the tech and healthcare stock-pickers. One possible reason for this is their orientation. Rather than looking to predict where a company will go, they try and influence where it will go. They aren’t competing by out-thinking and out-researching the market. They aren’t predicting earnings or if a product or service will succeed. Instead, they’re campaigning to improve the underpinnings of their target and change how returns are allocated to shareholders. Because they’re bent on change, the winners can count on the market’s perceptions of their past successes to re-price the stocks they happen to buy.

Active managers had a bad year, but it wasn’t just mutual funds. For too many managers, including hedge funds, it seemed that indexing would have been the smarter choice. Nonetheless, there were winners. And among them, the activists seem to be fighting the Peter Principle the hardest.