A pair of professors who are proponents of index investing have released a study which found that it's impossible to figure out how big of a factor chance plays in actively managed funds' performance. Eugene Fama, professor of finance at the University of Chicago Booth School of Business, and Kenneth French, finance professor at Dartmouth College's Tuck School of Business, authored the study, the findings of which were picked up by Sam Mamudi in the Thursday edition of the Wall Street Journal Fund Track column.

Luck Versus Skill in the Cross Section of Mutual Fund Returns looked at the performance of 3,156 stock funds from January 1894 to September 2006.

"People don't understand the effects of chance [on returns]," Fama was quoted in the Journal article as saying. "And it's impossible to tell how big an element chance is in [good performance]."

Fama in the 1960s developed the efficient-market hypothesis, which posits that investors in stocks should not be able to trump the market because there isn't a way for them to know something about a stock that isn't already factored into its stock price.

One of his students at the University of Chicago was David Booth, who went on to start Dimensional Fund Advisors 1981. Booth last year donated $300 million of DFA's stock to the university's school of business, now renamed Booth School of Business.

The Journal article included a reaction on the study's findings from active manager John Osterweis, who runs the Osterweis Fund.

"There is clearly a difference between luck and skill," Osterweis said. "There are investors who, over many, many decades have proven they have skill." 

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