[MUSIC] So let us have a look at a very nice graph which is coming from a work that I published in the Journal of Finance. So what do we see here? We see that we have three population which are pictured. I have central distribution. So one population which correspond to the bad. I have in the right tail, the good one, so which will have a positive alpha. And in the left tail, I will have the ugly. So as you can see if I look at the right end, the right end is centered on 3.5 so they will generate a sharp ratio a T statistic but the T statistic is roughly the same as a sharp ratio which would be the ratio between an excess return and this term which is measured here by the volatility. In the center, I see that the distribution is centered on zero, so they will have an alpha which is equal to zero. And in the left hand, I can see that the distribution is centered on -2.5. So of course, as an investor, I do not observe those distributions. What I observe is what is in the Panel B. I observe only a mixture of these three populations. And as you can see in the right tail, which corresponds to the positive alphas, I will have a mixture between from manager who will generate a positive alpha, and from manager who will generate a zero alpha. Similarly when I look at the left tail, I will have a mixture between, for manager who have an alpha equal to zero so they can, from the middle distribution, and also from manager who will have a negative alpha. So as an investor, of course, what I would like to do is to look at the writing and I will, for example, only consider the firm manager where a sharp ratio above two. When I select those managers, the question that I want to answer is, am I really sure that among all of those firms managers, all of them are really good fund manager and they will generate a positive alpha? And as we can see, in fact, it's very difficult to answer because they will have a mixture between fund manager who have a positive alpha and fund manager who have a zero alpha. So let us look at the results of the methodologies. So this is a slide where I show that to as manager they are, in fact, very, very angry. So why they are angry because if you look at the result, the results are not so nice. As you can see I have roughly 75% of the fund manager who deliver a 0 alpha so they are not able to be the market. I have 25% of the fund manager who will have a negative alpha so that will underperform the markets where they will destroy value, and I have only a very, very tiny proportion of all performers. And as you can see, the proportion is tiny and is equal to 0.6. So now let us have a look at the evolution of that proportion through time. So we saw that the proportion is indeed tiny, it's equal to 0.6, so how was the evolution of that proportion when I look at the window so I will look at the out performer on the window of 5 years. And as you can see the proportion was in fact, quite big at the end of the 80s but now it's very small. We can see that you have a really, really strong decrease of the performance and on the contrary you have an increase in the underperformance. So it means that nowadays it's very, very difficult to find active fund manager who will be able to beat the market. So what I have also done is to update a little bit the time series or the history. And as you can see if we now focus on the figures which are associated to 2012, you can see that in fact the proportion is even lower. We have just seen that the proportion of out-performers is very tiny so now what the potential explanations for that? One potential explanation is, in fact, that you have new entrants in the market. So again, if you look at the late 80s, you can see that the number of fund manager who were in the market was only 400. If you look at now what is the number of fund manager available on the market, you will see that they are close to 2,000. So you have really, really a strong increase of the number of firm manager in the market. And when you see the gross you have on the country a strong decline in the average performance delivered by the firm manager and indeed if you look at the average alpha, the average alpha is now very small. So what does it mean? It means that in fact you can have a type of dilution effect so the new entrants, in effect, are not so good for manager, and they have diluted the average performance of the mutual fund industry. So what is another explanation is too many expenses. So in the previous lives what I have done is really to focus on the performance. But after fees, so after you have bid, as an investor, the fees to do the active management. Now, let us look at the figures but before fees, and as you can see here, the proportions are quite different. And indeed, if I look at the proportion of performers, I go from 0.6% to 9.6%. So what does it mean? It means that probably to explain the difference between 0.6% after fees and 9.6% before fees, it means that the fund manager, in fact, raised too much, the fees, and they will simply it on the performance that generates through the fees that are invoiced to you. So if you look over the European data the picture is a little bit more rosy. And indeed if you look at the proportion of fund managers that were able to out perform the market, now we are at 1.8% instead of 0.6%. So what does it mean? Does it mean that you are fund manager are much more capable of managing actively with respect to the US counterpart? In fact, this is not the answer. The answer is that when you look at the European fund manager, they often have a factor loading so a beta with respect to the market which is not equal to 1 but which is much smaller, roughly equal to 0.6. So it means that if you look at European fund manager, often what they do is they deviate from the equity mandate, and they will try to invest, for example, in the bond market in order to outperform the equity market. But this is, in fact, has nothing with respect to the equity market. So what have we learned today? So basically three stuff. The first one is that indeed, the added value of active management is really, really debatable, and this is a really, really controversial question. So this is the first that we learn. The second one is that if you look at passive investment, this has a potential added value. So the that we have learned today is when you buy a mutual fund, pay really a lot of attention to the fee structure. Because often the fee structure will eat the all performance which is generated by the active manager. [MUSIC]