The most recent issue of Bloomberg Markets magazine featured a photo of a stately gentleman with a blazing headline that read, ‘This Fund Manager Has Consistently Beaten the S&P 500 for 40 Years.’

The article highlights the performance of The Nicholas Fund (ticker: NICSX), a $3.6 billion mutual fund run by Albert Nicholas, who started the fund in 1969.  The article says that he has outperformed the S&P 500 by an average of two percent per year for 40 years.

Nicholas is quoted as saying, ‘some guys who are smarter than I am say we can’t outperform like this, but we have done it, so I will leave it at that.’

I feel badly quibbling with an 84-year old fund manager who has been running this fund longer than I’ve been alive, but I want to make a point here that is often overlooked: nobody, not even the most dedicated efficient market hypothesis (EMH) person, says that you can’t outperform the market.

The argument is a little more nuanced than that: you can beat the market with exposure to well-known strategies like buying smaller stocks (size premium), cheap stocks (value premium) high quality stocks (quality premium) or stocks with positive momentum (momentum premium).  Once you control for these factors, it’s hard, if not impossible, to beat the market.

I was curious about the Nicholas Fund history, so I downloaded as much performance as I could find on the Bloomberg terminal, which, unfortunately, only goes back to 1986, so I can only see 29 of the 40 years of history.

I have no doubt that the statements in the article are factually accurate, but the history that I was able to find isn’t quite as good: since January 1987, the fund is up 9.84 percent per year while the S&P 500 was up 10.42 percent per year.

My goal with this article is to show that outperformance, like that of the Nicholas Fund, can be explained using EMH theory and isn’t really the result of superior stock picking as the article would have you believe.

To do that, I had to cherry pick the data a little bit and find a period where the fund actually outperforms the S&P 500, so I picked the 10 years ending in December.  Over that period, the fund earned 10.08 percent while the S&P 500 earned 7.67 percent, a beat of 2.41 percent per year.

To figure out whether the Nicholas fund earned it’s terrific performance through superior stock-picking or exposure to some of the aforementioned well known strategies (size, value, quality and momentum), I ran a regression against these factors to see how much of the return (and outperformance) is explained by the exposures or by old-fashioned stock-picking skill.

As it turns out, most of the outperformance is explained by exposure to the factors, which makes sense when you look at the holdings or read Mr. Nicholas’ description of some of their companies.

Some of the outperformance could be attributed to skill, which is called ‘alpha’ in academia.  In this case, 0.72 percent of the annual return can’t be explained by the different factor exposures and can be attributed to skill (until another professor comes up with another factor).

Still, though, it’s interesting that most of the outperformance is explained by the factor exposure, which can be obtained through simple index funds.

Furthermore, the regression also tells you how much confidence you can have in each result, and while we have 99.99 percent confidence in our exposure to quality stocks, we only have 39.62 percent confidence in the alpha (less than a coin toss).

When the academics talk about the difficulty in beating the market, they aren’t saying that you can’t outperform, they are saying that it’s hard to outperform once you control for a handful of well-known strategies.

I’ve been at this long enough that I don’t think there is much alpha out there either.  Fortunately, you don’t need alpha to enjoy nice returns.  Even without factor exposure, markets have rewarded investors over time and systematic exposure to widely known factors was even better.

Let me be clear, I have no problem with Mr. Nicholas.  I think that the people who have done this for decades without the benefit of all of the academic research over the years are really impressive.  Plus, I hope to be an 84-year old industry veteran with a wealth of experience at some point.