Do you believe that markets do a good job of pricing securities, or in other words, that markets are efficient?
If markets are indeed fully efficient, investment managers w ho focus on finding mispriced stocks would be in a tight spot. Recent research by Dimensional Fund Advisors has found that most fund managers underperform their benchmarks.
Every day in the global financial markets millions of buyers and sellers make trades with a cumulative value in the hundreds of billions of dollars. The market aggregates v ast quantities of information into stock prices. When fund managers look for mispriced securities, they’re pitting their insight against the vast universe of all market participants.
Looking at the mutual fund industry is one w ay to test the market’s pricing power. If the market fails to incorporate all existing information into securities prices, there will be opportunities to identify mispriced stocks and capitalize on market pricing errors. But how many mutual funds consistently outperform their benchmarks? Take a look at Dimensional’s research to get an idea of manager performance and the pow er of market prices.