The Australian Financial Review recently surveyed 359 share funds, ranking them based on performance and fees. There are 29 funds who earned an "A" on their report card. It's a shame the survey didn't dig a little deeper ... less than half of the A-graders beat the market and charged more than twice the fees that index funds charge.

The June edition of Australian Financial Review's "SmartInvestor" magazine has surveyed Australian equity funds, hunting for "top-notch performance at a bargain price".

Some 360 funds were compared and ranked according to their three year performance, cross-referenced by their fees. The "A grade" group showing the highest returns and lowest fees consists of only 29 members.

The best performer in A-grade earned 15.68%, delivered with a fee of 0.95% for a net return of 14.73%.

This top-of-the pops manager was asked for a comment on his strategy and, in a nauseatingly familiar boast about their unproven ability to pick winners and time markets, said "With the market's reliance on companies' earnings guidance in recent years, it has created an opportunity to identify inconsistencies in fundamentals and stock prices, from both a stock-picking and macro perspective."

Let's reflect on this for a moment ...

Is he expecting us to believe that he got it right in the large company sector, the most exhaustively researched sector in the Australian sharemarket, while everyone else got it wrong?

Some of the largest stocks in the Australian sharemarket are mining companies like BHP. Armed with his ability to pick winners, how does he account for the fact that the resources index posted a return of 30.02% compared with his 15.68%?

Perhaps we're taking this the wrong way. Perhaps he meant he can identify underpriced ‘Penny Dreadfuls'. Nope, the small company index beat him too, returning 15.72%.

The return from the entire Australian sharemarket was 14.15% per annum. The best performers surveyed achieved a median result of 14.07% per annum, with a price tag of 0.85%, a net result of 13.22% per annum. These are the best performers, mind you, not the worst.

Why would the AFR article not include any reference to a comparison benchmark such as the All Ordinaries or something similar? If it had been made clear that 94% of these professionals failed to keep up with the market, the public start to wonder whether it was luck or skill that only 6 in 100 managers delivers any value.

So was it genuine skill or just luck that this top-of-the-pops manager outperformed his peers and the market?

The only way we'll know is to perform the same exercise after a suitable period that is statistically likely to remove luck from the equation - say another 15 years or so.

While you're waiting, where would you like to park your cash? Odds are over 10 to 1 in favour of the market index!

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