According to the “efficient market” hypothesis, the trading opportunities conferred by securities analysis will rarely cover the cost of transacting. Although the evidence on fund performance reported by Friend, Sharpe, Williamson and Jensen supports this hypothesis, other kinds of evidence—for example, that corporate insiders achieve above-average returns by trading in the shares of their own companies—challenge the theory. To some observers, the fact that professional investors range widely in intelligence, education and experience makes the absence of significant performance differences highly counter-intuitive.

The authors undertook to measure performance of a large sample of pension and profit-sharing funds, laying special emphasis on the question of consistency in performance over time. To test for consistency, they broke their time sample into two five-year periods and ranked and grouped portfolios by their performance in the first period. The group of equity portfolios that ranked highest in the first period continued to perform better than the lowest ranked group in the second period.

Needless to say, the authors’ findings cast doubt on the efficient market theory and on the contentions of its advocates that (1) securities analysis is futile and (2) the only prudent way to invest is through an index fund.