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Pick a fund, any fund…pick a manager, any manager

Oct 06, 2014
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Tim Hartford is an economist and a sophisticated thinker.

In the Weekend FT Tim writes about fund managers and passive investing and suggests all financial assets have the same expected risk adjusted returns or ‘not far off’ and then way pay for active asset managers.

I heard something similar at a presentation in Zurich where a friend of mine compared long term returns from commodities and equities and deduced that they are more of less the same over, say a 30 year, period.

There are obvious flaws in these observations and conclusions:

1. The size of each asset class is different and if we were to allocate assets to each class in more equal way, the risk-return profiles of the different asset classes would change., simply because commodities cannot absorb the amount of capital allocated to equities.

2. For the average productive citizen who starts to invest in financial asset around 27 or 30 years of age, waiting for outcomes over another 30 years is plainly bad economics. Investments need to pay off in absolute terms over much shorter time spans. After all one is taking risks for all periods one is invested.

Tim says, “Most active managers in most time periods do not manage to outperform passive funds – particularly not when their fees are deducted. As a matter of arithmetic, the average investor cannot beat the market because the market is the average of all the investors. ” and he goes on to say:
“But we might still expect that skilled active managers would consistently beat the average, and yet most of them cannot. Apparently skilled active managers often see their performance ebb over time, and for every Warren Buffett there are many one-hit wonders in the world of investment.”
We happen to agree with this observation that active managers cannot beat passive investing after fees. If one looks even at Warren Buffett’s returns and pays attention to the structure of his vehicles and takes a  close look on how he has managed to achieve his returns, one can start to question if on a risk adjusted basis Warren has indeed done the superior job compared with passive investing. In order to do this one needs to look at how Warren funds his investments and how much leverage he is able to use and add to that the fact that Warren has never been short of cash and can buy the markets on dips. The ability to average down has huge implications on returns – a luxury not enjoyed by most active investors.
What Warren Buffett has done brilliantly is to buy low volatility, high income generating stocks with strong cash flows. That alone puts Mr. Buffett in a class of his own.
We did a similar analysis of Anthony Bolton’s performance during the years that he was a star manager. We found that had Anthony not used leverage by investing into emerging markets and had he not then used the FTSE 100 Index for performance comparisons, the results on a risk-adjusted basis would not have looked as impressive.
The debate on active vs passive needs to be broadened to include systematic active. This is what we do. Our strategies beat passive investing with consistency. On a risk adjusted basis our approach beats passive investing by a very significant margin.
Have a look on these pages and compare with any active manager!