Resist the call of the Siren
24/01/2019 12:35:27 AM //
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Today we had an email exchange with an existing client. He had received a marketing email from an advocate of active asset management. The marketing email referenced the passing of John “Jack” Bogle, the rise of passive investing, the inefficiencies (to their mind) of blindly allocating capital to undeserving companies (via the rise of passive indexing) before going on to conflate the lot and confidently state that now was the time for active managers to shine.
The marketing email was not so bold as to say which active managers would shine, but I’m sure they would if you wanted to part with some hard earned cash…
Anyway, he asked 'us' what we thought. There was a brief email exchange to which I was cc’d and eventually chipped in with the following:
“My two penneth for what it’s worth…
From time to time active managers, or their supporters, claim that now is the time for them to shine. The is no evidence to suggest that such claims have been validated in the past.
The move to passive (magnitude and timescale) has been entirely logical. Lowering cost is one of the few things one can control about our investing journey. The regulatory focus on cost, and disclosure of costs, has further fuelled this logical rotation. Bill Sharpe’s 1991 paper The Arithmetic of Active Management gets to the heart of the issue https://web.stanford.edu/~wfsharpe/art/active/active.htm This is a must read.
Some active managers can and do make above market returns. We know this for certain. We also know for certain that you cannot identify said managers in advance. We also know for certain that the outperformance eventually subsides, flattens or reverses.
Opting for a lower cost route that eliminates the chance of picking a dog (most active funds are dogs to varying degrees) is a path that a prudent person would take. The exception is where a person prefers to gamble on finding that temporary outperformer, genuinely think that they can beat the rest of the market or they are just susceptible to powerful marketing spin – by those that think they can beat the rest of the market.
We like the lower cost, less speculative option. That said, if I can be given a guaranteed outperformance over the market (less my costs) then I, as a rational person, would take that guaranteed investment. Sadly, I’m yet to see an active manger offer to compensate investors if they fail to beat the market.
The Norwegian sovereign wealth fund is a good example of an institutional investor with views aligned with ours (rather ours are aligned to theirs). We wrote about this recently and have a short video featuring one of its architects. https://www.private-capital.com.hk/blog/December-2018/The-Norway-Model
There’s a good video on how Bogle influenced a chap called Robin Powel. Robin is a good friend of ours and a huge voice championing transparency and lower costs for retail investors. It’s a quick watch https://youtu.be/YE_HBEEAUHc Full disclosure – one of Robin’s companies produces video material for us.
If you have a bit more time, then an extension of the active/passive topic is the ‘can you predict bubbles’ debate which the active guys and gals love. This video of Richard Thaler and Eugene Fama is well worth a watch. https://www.youtube.com/watch?v=bM9bYOBuKF4”
I deliberately kept it brief, opting not to cite evidence to support a few of the statements I made but a swift visit to SPIVA
will put that right.
The answer is simple: resist the siren call of active. Tune-out the noise, stick to your low-cost indexing, stay disciplined and do something fun with the time you save.
I want to thank Mr. W for asking the right questions and for making us think.
Do you want any help tuning out the noise or have any questions that need some thought? We would be happy to assist