I could not help but smile at this report in the FT this morning:
Nine out of ten US equity funds failed to beat the market over the past year, according to a new study that undermines active managers' claims that they can outperform in more volatile markets.
There was not a single category of domestic fund – whether investing in large-caps, small-caps or a combination, or favouring growth stocks or value stocks – in which more than a quarter of managers succeeded in beating their category benchmark.
It would be hard to find any report that without explicitly saying it so roundly condemned the rentiers within our financial services economy. I have little doubt the UK would be not much different, overall.
The question is why we as a society continue to tolerate the waste they impose upon us through their costs, through their poor advice to pension funds and through the innovations in financial services (like most improvements to reporting) that they seek to strangle at birth.
If cigarettes require a health warning so should active portfolio managers. It should say something like:
WARNING: We only exist to damage your wealth at gain to ourselves
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I saw a UK based program some years ago where a portfolio manager and 5 year old child were pitted against each other. The 5 year old won. Maybe some else can remember more details?
I am not surprised
I am unaware of the details
Prima facie I totally agree with your thoughts.
But I am also struck by something else.
Such ‘wealth funds’ have not always underperformed. The fact that they may appear to be doing so now indicates to me just how this sort of market fundamenalist captialism is so self-defeating in that is destabilises even the better managed and ethically ran funds.
I’m also struck by what might be the need for the financial sector to create more mayhem and chaos in the future to create opportunities for them to make money as this will be simply the only way to actually make any gains in value for their funds. This is very worrying.
Great post, Richard. The cigarette analogy is an appropriate one.. Just as Big Tobacco sought to undermine the evidence of links to cancer in the 1960s and 70s, so the fund management industry is trying to distract attention from the many academic studies which show that active management is a losing game for the end investor. And you’re right –Â as a society we shouldn’t tolerate this stealth tax on businesses and individuals any longer.
Like almost all of us here I imagine, we all realise the importance of maximising returns on pension contributions, for everyone who is lucky enough/wise enough to contribute to a pension.
So I’d just like to point out that
a) the best active fund managers tend to far outstrip their benchmarks
b) the US is a bit of a unique market for active and passive funds in that it often happens that active funds do worse than passive. Almost everywhere else, active tends to do best.
That’s not to say there aren’t a lot of very poor and very wealthy fund managers or that fees on pensions and funds are far too high. Just that there are a group of fund managers that provide very good returns and these are very important to our pension funds.
PIRC and the LAPFF did report excellent returns to local authority pension funds this week – which made the idea of pension deficits look a little off, as Anthony Hilton said in the Evening Standard
But exceptions do not prove rules
And much of the gain was from QE
There are indeed some funds that outperform, but you would expect that
from the law of averages. The academic evidence shows that around 1%
of funds outperform over the long term, which is no more than you would
expect from random chance. Research has also shown that they’re almost
impossible to identify in advance. Furthermore, contrary to your second point,
the SPIVA data produced by S&P Dow Jones Indices shows that the failure of
active funds to outperform is a global phenomenon. The City would love us to
believe that the UK is a special case, but it’s not. You’ll find the relevant studies
on my website, The Evidence-Based Investor.
Robin, apologies I couldn’t find the exact reports you were referring to on your websites as there are quite a lot of articles.
I am sure you are relatively familiar with the general critique of your critique of active investing. Apologies if I don’t go into it in detail due to the amount of time it would take me to properly research it. But as it is something I feel relatively strongly about, just in case anyone is interested in a counter-veiling argument (I address the argument to Robin though):
Many of the arguments against active investing focus on the notion that it is necessary to compare the ‘average’ active fund with the benchmark passive fund. And this is precisely what I would suggesting is a false comparison.
For example, tying to establish this comparison is at the center of one of your critiques of research that finds active funds to outperform: eg. http://www.evidenceinvestor.co.uk/uk-active-fund-managers-how-good-are-they/ . You argue that any research that compares 10 year performance of average v passive funds is that it excludes all the active funds that didn’t last 10 years, usually because they did not perform well. (You call this survivorship bias).
But then we have to ask, what funds do Uk pension schemes invest in. And the evidence is that they tend to invest in well proven managers with good track records, rather than upstarts in new and untested funds. So there is a reason why it is valid to allow for survivorship: precisely because more pension fund investments are made into funds that survive.
As I said, apologese that I can’t go into a more detailed argument, but this article provides at least some technical arguments in favour of active investing.
http://www.standardlifeinvestments.com/WP_Active_Investing/getLatest.pdf
(And yes, obviously it is written by a company seeking to promote investing in active funds).