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Weekend reading: If the market is getting dumber, active managers must be morons*

Weekend reading: If the market is getting dumber, active managers must be morons* post image

What caught my eye this week.

How is it September already? Once again spring teased us with a heatwave, summer soaked us, and autumn is sneaking up with an existential crisis.

Some things never change, however, such as passive investing guru Larry Swedroe’s ability to take apart criticism of indexing strategies with the precision of the EU’s Michael Barnier taking apart the delusional New Victorians we’ve sent to Brussels to peddle Brexit for us.

But we did that last week, so instead let’s enjoy a quote from Swedroe on the idea (pretty much fabricated in a fund management marketing department brainstorm, as best I can tell) that markets are becoming inefficient as a result of passive investing:

50 years ago, there was a small fraction of the number of mutual funds we have today, and the hedge fund industry was in its infancy. On top of that, individuals dominated the market, because the majority of stocks were held directly by investors in brokerage accounts.

The research shows that retail money is “dumb” – active managers exploit its pricing errors. But even back then, the evidence was that on a risk-adjusted basis, in aggregate, mutual funds underperformed – though not anywhere close to as poorly as they are doing today.

For example, about 20 years ago, roughly 20% of active managers were generating statistically significant alpha.

As noted above, the figure today is just 2%, with no evidence the trend is reversing.

Just 2%! Where are the active managers skipping around picking up the golden apples that passive investors are scattering across the ground?

Nowhere, that’s where. Active investing must always be a zero sum game, but if the market is really getting stupid then more than 2% should be profiting from it. They’re not.

I love stock picking, but I wouldn’t pay anyone to do it for me. If I am going to pay over the odds for something I can do for myself, I want to know I’ll get superior results.

Sushi chef? Foot masseuse? Belly dancer? I’ll happily shower money on them.

Almost-certain market-lagging fund manager? Not so much.

*To be clear, active managers are not morons. They’re invariably extremely clever, and I’ve enjoyed the company of every manager I’ve met. The answer to the riddle is rather that the market has NOT got any dumber due to passive money. It may never.

From Monevator

MiFID II and you – Monevator

From the archive-ator: How to score an own goal – Monevator


Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

How you can get 24 days off in a row in 2018 using 14 days of annual leave – Telegraph

UK insurance payouts to shrink after U-turn on lump sum formula – Guardian

Smart Investor switch angers Barclays Stockbrokers’ clients [Search result]FT

‘Buoyancy’ returns to UK housing market, as prices edge up 0.1pc – Telegraph

First-time buyers in London gain edge over buy-to-let landlords [Search result]FT

High earners face pensions tax taper shock [Search result]FT

It’s taken 10 years for emerging markets to reach their pre-crisis highs – The Atlas Investor

Products and services

How studying abroad could save you £50,000 – Telegraph

The cost (to an index fund) of turnover in an index – Oblivious Investor

How to invest your Junior ISA – ThisIsMoney

‘Is my smart meter charging me for the energy generated by my solar panels?’ – Telegraph

Help-to-buy scheme aids some buyers, but boosts builders even more – Guardian

Comment and opinion

Darling, benchmarks are soooo last year – The Evidence-based Investor

The Cobra Effect, and the risk of owning bonds – Of Dollars and Data

How to be an angel investor: Interview with Jason Calacanis [podcast]Meb Faber

Improving the Safe Withdrawal Rate for UK retirees – Retirement Investing Today

Swedroe: Passive investing misconceptions – ETF.com

Howard Marks’ clarifies his warnings about the bull market [PDF]Oaktree Capital

30 obvious investment truths – A Wealth of Common Sense

Now what? Presentation on the state of the market [Slides] – also Ben Carlson, via Scribd

The challenges of using a funded ratio to track progress towards retirement – Kitces

A thoughtful Neil Woodford on his poor recent performance [Video]Woodford Funds

Why automation shouldn’t the end of employment – The Value Perspective

When gold can brighten up your portfolio – Interactive Investor

The fickle fortunes of market timing – Bloomberg

Off our beat

The Brexit fallacy of migrants taking British jobs and driving down wages – Vince Cable

Self-driving cars on their way and Morgan Stanley is down to party [Search result]FT

What we get wrong about technology – Tim Hartford

Few cities could accommodate Amazon’s new headquarters – Bloomberg

A soft Brexiteer tells the Hard Brexiteers why they’re wrong – Pete North via Twitter

Social networks: You are the product – London Review of Books

A stern letter from the tooth fairy – Henry Warren via Twitter

And finally…

“Active managers charge relatively high fees for the ‘promise’ of alpha. If their outperformance can be explained by exposure to one or more factors – also often referred to as beta, or loading, on the factor – there was no actual outperformance, or alpha, on a risk-adjusted basis. If that is the case, the high fees charged by active managers can no longer be justified.”
– Larry Swedroe & Andrew Berkin, The Incredible Shrinking Alpha

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{ 41 comments… add one }
  • 1 dearieme September 8, 2017, 8:20 pm

    I suppose that if Amazon wants to be out of the range of hurricanes, NORK missiles and vile winters it should base itself in ……. Dallas/Fort Worth or Denver?

    Or just not the US. How about demolishing all that Olympic rubbish so that they can open HQ2 in London? Ruled out by the airports I’d think.

    Not the Ring of Fire. Not Oz. Not the subcontinent nor China. Not Africa. Not Latin America.

    Schipol is OK: how about Amsterdam?

  • 2 Old_eyes September 9, 2017, 11:42 am

    From memory Schiphol is below sea-level already. Might not be a smart long-term bet although the Dutch are historically good at managing this sort of thing.

  • 3 Gregory September 9, 2017, 12:10 pm

    Passive investing is prudent but not perfect. “Garbage in, garbage out”Christopher H Browne

  • 4 Tim September 9, 2017, 12:19 pm

    A great crop of interesting links this week; thanks!

    That “You Are the Product” piece reminded me of this incredibly prescient Wired piece from 1997… https://www.wired.com/1997/12/es-attention/ (good grief; that’s 20 years ago now!)

  • 5 Mr Art September 9, 2017, 2:24 pm

    The best part of the Tooth Fairy twitter thread is where Mail Online asks to use the photo on their website and he refuses.

  • 6 Prof V September 9, 2017, 2:49 pm

    As always, a nice weekly compilation.

    Reading the Vince Cable link, it is amazing that there is not wider understanding of the benefits of being in the EU, when there is evidence to the contrary.

  • 7 Alex September 9, 2017, 3:35 pm

    Are we edging back up to the pre-makeover numbers of links? Don’t overwork yourself TI!

    (Though you may have missed a couple of interesting articles in the Economist in your roundup)

  • 8 Bb September 9, 2017, 9:36 pm

    Great links, thank you.

    The pension taper is a real pain… Does anyone know of a calculator that works out how much it is possible to contribute? Working out how to account for salary, rental income, charity, work pension contribution is a massive headache.

  • 9 Honza September 9, 2017, 9:44 pm

    “*To be clear, active managers are not morons. They’re invariably extremely clever, and I’ve enjoyed the company of every manager I’ve met…..”

    I must admit I find this very very hard to understand. Your (professional) life is geared towards trying to help the financially inexperienced make sensible investing decisions, yet you seem to relish time spent with those active managers who are clever and experienced enough to know that virtually everyone should stick with index trackers, yet manage or sell their clients active funds in order that they (the fund manager) can live in Chelsea and send their children to private school.

    I’ve never met a single fund manager, so can’t comment on their social skills, but I absolutely resent their dishonest, cynical and self-serving business practices.

    I have looked after a few family members money matters, and I am continuously amazed by the innapropriate investments sold to them by the financial industry. Equity and emerging market bonds for one 76 year old with a history of very significant medical problems? All at a (final all in) cost of 2-3% per year? Meaning ten times more experience than an index tracker.

    These are people who steal for a living.

    How would you feel if the managers you were meeting were in the tobacco industry? How would you feel about them then? Would you slap them on the back after a good lunch, laughing inwardly at all those stupid little people addicted to nicotine? No, of course you wouldn’t. So why do you have this reaction to fund managers?

    This post (while obviously bitter and heartfelt) is meant to make a serious point. You know active managers are pointless (as you say the maths proves it), active managers know active managers are pointless, and yet instead of being publically shamed as the charlatans they are, the commenteriat remain silent. It’s really very strange.

  • 10 Grislybear September 10, 2017, 12:14 pm

    On the subject of active management . Peter Hargreaves is putting 25million of his money into a new growth fund mainly invested in US. Chasing past performance and trackers work better in the US , come to mind. Could this be one of the signals to take some money out of your US holdings?

  • 11 UK Value Investor September 10, 2017, 12:52 pm

    @Honza – What people should do and what they want to do are often (usually?) two different things.

    People probably shouldn’t eat junk food, but they do because they want to. Does this mean managers of McDonalds restaurants should be ashamed?

    What about clothing? From a utilitarian point of view we could probably all walk around in potato sacks to keep warm and hide our embarrassment. Should people who work in the the fashion industry be ashamed because they’re causing us to waste money on clothing which is much more expensive but has little more utility than a potato sack?

    At the end of the day, most people should invest in index funds, but some like to try to beat the market so they invest in active funds. Active managers provide that service and I don’t think that’s anything to be ashamed of, as long as they have their client’s best interests at heart.

    Tobacco products are slightly different because they’re usually addictive, but I see that more as an issue for regulation, i.e. how addictive can a substance be before it should be banned.

  • 12 The Investor September 10, 2017, 2:04 pm

    Hi Honza,

    “*To be clear, active managers are not morons. They’re invariably extremely clever, and I’ve enjoyed the company of every manager I’ve met…..”

    I must admit I find this very very hard to understand. Your (professional) life is geared towards trying to help the financially inexperienced make sensible investing decisions, yet you seem to relish time spent with those active managers.

    Really? It’s a pretty straightfoward statement. They are not morons. They are fun to chat with if you’re like me. That’s all I’ve said, anything else is a projection.

    Active stock pickers are invariably intelligent and usually curious and obsessed with markets. I am an active stock picker (unlike my co-blogger @TA) who is at least not stupid, is curious, and is obsessed with markets.

    To be honest I think it’d be harder to understand how I could not enjoy their company. 🙂

    If by my professional life you mean this blog, I’m afraid to say creating this blog that let’s people learn for free why and how to save money and invest effectively and cheaply is not a great business model.

    Over the 11 years of its life my income from hours spent on it probably works out to roughly the minimum wage. (Simplifying: It was nothing in early years, then okay, then a good year or two, and now due to changes in ad market etc were’ back down to okay again, but going in wrong direction). Luckily, I sing elsewhere for my supper.

    Over the last five years nearly four million people have viewed this site, and I am sure we’ve saved UK investors millions of pounds by directing them towards passive investing. (This isn’t including any influence on institutional money, which Lars Kroijer was pointing out to me the other day is where opinion formers such as Monevator and his own writing can really move the dial).

    So I feel I’ve done my bit. Meanwhile, 99.99% of readers have paid me nothing for it. Were they stealing?

    I don’t think fund managers are crooks, as you seem to. Certainly not on a personal level.

    There is definitely something in the wider point you’re making, acknowledged. But I’d echo @UKVI’s comments. It’s a free country. To be honest my patience is running out with the average person, who literally spends more time thinking about which craft beer to try or which handbag or whatnot than how to invest. I can count on one hand the number of people who’ve asked me / sought advice in real life over the past 10 years about investing, beyond humouring a 5-minute chat/download from me. These are people who often know about my obsession, sometimes even this blog.

    I’ve long stopped telling people what to do. Even on this site, I am careful to continue to cover all bases — e.g. we write about investment trusts, which are managed, often. There are many ways to skin a cat.

    I think you’re somewhat conflating fund management with financial advisors, also. Particularly pre-RDR, the latter could really be diabolical. But the worst practices there have been eradicated, just as with fund management the old 5% upfront charges for investing in unit trusts have long gone.

    Things aren’t perfect, but we’ve basically got it pretty good. It’s never been easier or cheaper to invest. There has never been more information available. There has never been more choice. The tax shelters are awesome. Charges for platforms etc, for all the sporadic outrage, are generally incredibly low versus the past 150 years.

    Sometimes I think passive investors protest too much. If somebody wants to pay an extra 1% or even 2% to invest actively, for whatever reason, good luck to them. They’ve had plenty of opportunity to find out why they shouldn’t.

    Do you think the rich and sophisticated people/investors who have $3 trillion in hedge funds charging fees that dwarf those of active mutual funds think their managers are crooks? Despite hedge funds’ consistent market-lagging returns for a decade?

    At some point you have to accept people are paying for something they want. It might not be logical to you or me. But it’s not stealing.

    Finally, as I’m sure you’re aware, passive investment is only possible and cheap because it sits on the back of the expensive active fund management industry’s research and buying and selling that keeps the market efficient. Yes, it’s a much bigger sector than we need for that currently, but the broader point stands.

    If I was a pure index fund investor (as, for instance, all my friends are who HAVE asked me for investment advice over the years and followed it) I’d smile every day when I read about a fund manager in the newspaper or saw an advert on the tube.

    Off the manager goes, every day, working *for you* for free. 🙂

    Thanks for your comment. I see there’s scope to see a contradiction/tension. The above may not satisfy you that it’s resolved, I appreciate that.

  • 13 gregory September 10, 2017, 2:51 pm

    @Honza – Index tracker funds are not a panacea but a great business (like active funds). Financial industry is not relief organization. Passive gurus have lucrative business interests.

  • 14 Hariseldon September 10, 2017, 3:17 pm

    The major problem with active versus passive is cost.
    The apparent cost for a tracker may be .07% to .3% typically, on top of that there will be some other costs related to turnover and withholding taxes, this may be partially offset with fees earned from securities lending, the costs overall are generally pretty low.
    Some investment trusts are also pretty cheap, .3% to .5% are not uncommon. There will also be trading costs etc but the company structure has merit, prevents mass redemptions at times of market panics, the ability to change the manager , at times trusts can be bought at a discount and this can boost performance and cut costs, e.g. Buy at a 10% discount and the income received by the portfolio is enhanced compared to the same portfolio bought outside a trust and this can mitigate costs.
    The overall costs of some investment trusts taking all factors into account are not that much different to many passive funds.
    When one has an index , say the FTSE 100 where a few stocks form a large part of the market you are getting a lot of non systematic risk, a thoughtful active diverse portfolio from the same universe of stocks could do just fine compared with the FTSE 100, over time with the provision that costs were low.

    I hold mainly passive funds but active management is not necessarily stupid, particularly if you want to follow a value approach for example, a thoughtful active approach to selecting a value portfolio could be equally valid or better, compared to a mechanical factor based “tracker”

  • 15 Alex P September 10, 2017, 6:26 pm

    Hi, thanks for the links monevator.

    Can anyone tell me where the Swedroe article is that is referred to in the blog? I looked through last weeks blog and I can’t find it. Thanks in advance.

  • 16 Honza September 10, 2017, 8:02 pm

    I for one am extremely sorry that you haven’t earned more from this site. I have been a reader for many years and it has saved me tens of thousands. I wish that a better payments system had emerged for sites like this rather than just relying on advertising.

    @UK Value Investor:
    Should McDonalds managers be ashamed of what they do? That for me is the absolute crux of the argument. Should individual workers feel a sense of individual responsibility for collectively producing a product which harms the customer? Even if the customer has freely chosen to eat McDonalds?

    Here’s a list of business practices. You tell me when you think the individual worker/manager should begin to take responsibility:

    Fast food restaurant
    Supermarket chain that uses 3 layers of packing
    Cinema manager where volumes are so loud that customers hearing is likely to be damaged in the long term
    Car company that suppresses safety information causing needless injuries
    Make-up company that releases billions of microbeads into the world’s seas
    Oil company dumping toxic waste in the Amazon rainforest
    Etc etc etc

    In my opinion fund managers are worthy of being particularly singled out for two reasons:
    Most people don’t understand finance so they turn to finance ‘professionals’ in the expectations that those advisors will work on their behalf. So it’s not simply a question of people buying something they want. This isn’t a Share Club with knowledgable individuals like The Investor sitting round, ale in hand discussing P&L, CAPE & EBITDA. These are fund managers systematically mis-representing the service they offer and the returns investors are likely to get. Have you ever read the marketing blurb from companies like M&G, Jupiter, Schroder etc? They are pure fiction, given the facade of respectability by data mining and selective time periods.
    Fund managers make a tremendous amount of money. Paid for by you, me, and 90% of UK investors, most of whom will have no understanding that by paying your advisor/fund manager 2% per year you are likely handing them 40-50% of your total returns.

    My personal opinion is that Western Capitalism is far too quick to forgive companies and the people that work for them, particularly senior management who live in a ‘heads we win, tails you lose’ world. If all goes well they get paid extraordinarily well, and if all goes badly the Ltd, plc, or LLP legal structures ensures that as individuals they face virtually no sanction and it’s the shareholder, the taxpayer or the environment that pays the price.

    Of course I’m hypocritical. I don’t recycle enough, I drove to Mothercare yesterday because it was raining, I buy index funds without any attempt to screen out companies that are unethical etc etc etc. I don’t have any answers, but at least I’m angry. Most people aren’t even that.

  • 17 The Investor September 10, 2017, 8:04 pm

    @Alex P — Oops, I meant to link to that in the article! Have added it now. It’s here:


    @Alex (other Alex) — Yes, it has become a bit of a mission again, back up into the 3-4 hour range. I’m still benefiting from doing it on Friday afternoon versus Saturday morning though. 🙂 (Although I’m losing Friday afternoon work time, so not super ideal. Will keep experimenting. Would like to get it down to two hours ideally).

  • 18 The Investor September 10, 2017, 8:17 pm

    @Honza — Very glad we’ve helped you save thousands with our writing. That’s mainly why we do it !:)

    Yes, I should probably add some sort of premium subscription option or similar. Realistically though that’s more likely to be viable if targeted at more active types than super low-cost passive hounds… In which case… around we go. 😉

    The other option some readers have urged is some sort of Patreon / optional donation system, even just £2 a month say, but for some reason it sits poorly with me. There are people who say I’m just ignoring a whole income stream by not doing this. I need to think more about my reasoning for not doing it. (Perhaps I’m too old-fashioned, which is a poor one.)

    I should stress I have made what might seem reasonable money from this site, if you add it all up. You have to keep in mind though that I have put several thousands of hours of work into it over the 10 years or so. (Possibly enough to cross over into double digit thousands of hours in the next year or two, all-in, when you include comment writing, moderating, technical stuff, etc.) Hence my low wage estimation!

    There’s lots of stuff I’m not doing that other sites do to monetize partly because I think it conflicts with what we’re trying to achieve here. Which again suggests I should take the Patreon route.

    @TA has almost finished our book. If everyone buys a copy of that it’d help! 🙂

    Tiny violins away now. It’s my own doing. 🙂

  • 19 Chris B September 10, 2017, 10:38 pm

    @ Honza: You, like me, have benefitted from passive products so it’s not like you’ve been short-changed by active fund managers. McDonalds managers are not guilty of anything: they just want a job to pay the rent, feed the kids, pay the gas bill etc. You are very idealistic and very angry. This will get you nowhere, other than an early heart attack. Ralax. The world is imperfect.

  • 20 William III September 11, 2017, 11:35 am

    @Chris B, Honza.
    Ffs YES we need (seemingly intelligent) people like Honza to stand up. His is NOT a fringe, idealist position. Read through Akerlof & Shiller’s ‘Phishing for Phools’ for a sense of just how deeply ingrained corporate abuse of customers is. (In case you’re wondering – yes, that’s the Shiller that invented the CAPE.) And do have a read through this great Bloomberg piece on Unilever: https://www.bloomberg.com/news/features/2017-08-31/if-unilever-can-t-make-feel-good-capitalism-work-who-can – there ARE alternatives.

    And @Honza, let me know when you find the low-cost index tracker with a credible responsible business filter..

  • 21 The Investor September 11, 2017, 1:06 pm

    Capitalism, in its current incarnation, works. It has never been cheaper to buy almost anything (notable exception: property, probably because rightly it is not a 100% free market build on the green belt market).

    Capitalism is so effective and caters for so many of our basic needs so brilliantly that companies have to invent and market pseudo-needs to get us to buy stuff we don’t need.

    Price competition is so fierce that services like banking are free (as opposed to costing £100s/£1000s a year equivalent like 100 years ago) which means companies have to find novel ways to try to get money out of us, that they are later rightly or wrongly burned at stake for. (See: PPI).

    Capitalism is so effective that central banks can’t get inflation off the floor, globally, despite the easiest money for 5,000 years.

    Capitalism is so accessible and potent in the West that hundreds of blogs exist across the web where people outline how they plan to work until just 35 and then turn themselves into mini-lorded gentry living off markets and buying abundantly cheap food and clothes for the next 60 years.

    Sure, get outraged if you like. I’m not justifying every last/particular practice. But I’d suggest we don’t lose sight of the wood for the trees. 🙂

    There is a high cost to the sort of high touch, highly regulated, benevolent, paternal and basically statist alternative some may be (perhaps unwittingly) calling for.

    Passive investors can run £250,000 in a globally diversified portfolio at a cost of 0.25%-0.30% a year, including all platform fees. The choice is there, and the information is abundant, not least on this 1.5 million word website.

    I’m afraid I’m not beside myself with fury. 🙂

  • 22 hosimpson September 11, 2017, 1:20 pm

    Here’s a spreadsheet by Pru
    There’s the carry forward allowance calculation spreadsheet, and the taper calculator (you have to click a button that’s in column L to be taken to it).
    You’ll notice that, according to the calculator, when you’re just over the threshold income limit, it is better to take a higher salary and make a personal pension contribution than to salary sacrifice an equivalent amount into the pension – exact same thing (plus / minus NI) , only in the latter instance the pension contribution is physically paid over to the pension fund by your employer. I thought it was clearly bollocks and the calculator must have been wrong. (What sort of a dipshit would come up with such a stupid rule where a tax treatment of something hinges on who pays the amount over to the pension fund?).
    It turns out I was wrong…. see example 3 here:
    Obviously, there’s the NI element… I haven’t gotten to quantifying the difference, but assuming you are in a higher tax band, your allowance is worth 40p in a pound to you, and NI is 2p plus whatever kickback your employer gives you for salary sacrificing into pension (anywhere from nothing to 13.8p in a pound, I imagine).

  • 23 William III September 11, 2017, 2:20 pm

    “There is a high cost to the sort of high touch, highly regulated, benevolent, paternal and basically statist alternative some may be (perhaps unwittingly) calling for.”

    Certainly, I fully subscribe to the view that free markets are by far the most efficient mechanism for allocating resources. But I worry about intergenerational and cross-income group/social class equity, due to insufficient control of externalities and the strong incentive for business to abuse human behavioural flaws. There are both market failures and government failures. Both need to be checked.

  • 24 Anon September 11, 2017, 2:55 pm

    I have some sympathy for @Honza’s views (agree there seems to be some conflation of the fund management and financial advice industries there though).

    IMHO one of the greatest misselling coups ever pulled off in this country is that “independent financial advisers” have been allowed to promote themselves as such for so long. Imagine if you went to a used car showroom and they told you “an independent personal transportation adviser will be with you shortly”… you’d struggle to keep a straight face (er, or do they actually try and call the salespeople that now? It wouldn’t surprise me). But noone would go into such an appointment under any illusions anyone is going to do anything other than attempt to sell them anything but a car of dubious quality with some dodgy financing and maintenance contracts too, even if “have you considered walking/a bicycle/a commuter season ticket/a car-share?” might actually be the best option for them that any truly independent “personal transportation advice” would recommend.

    Suspect anyone’s degree of distaste for the IFA industry is likely to be proportional to the degree they’ve been ripped off by it (once they realize it, if they ever do) or, (worse, believe me) by seeing relatives taken for an expensive ride but unable to explain what benefits they’re paying for beyond “but the adviser is really nice”.

    Fund managers I have no problems with: I imagine it’s a really interesting job, albeit one where short-term commercial, marketing & regulatory realities are likely to collide with what an “unconstrained”, long-term thinking fund-manager might actually like to do… but what job is there where that isn’t true? Even the most die-hard indexers must have to admit there needs to be some sort of active investment community disagreeing with each other about the value of things for there to be any sort of “price discovery” and for an index to even exist. The active funds I do hold, I’d like to think I’ve gone in with my eyes wide open. And if in time they don’t satisfy me, I get rid of them.

  • 25 The Borderer September 11, 2017, 4:00 pm

    @William III
    “But I worry about intergenerational and cross-income group/social class equity, due to insufficient control of externalities and the strong incentive for business to abuse human behavioural flaws”.

    I’m sorry to be so dumb, but I don’t understand what you said.

  • 26 The Borderer September 11, 2017, 4:18 pm

    @TI (21)
    “There is a high cost to the sort of high touch, highly regulated, benevolent, paternal and basically statist alternative some may be (perhaps unwittingly) calling for”.

    Indeed. My wife worked for a major University which invested several £millions via an IFA (charging a high fee) into several OEICs all charging (to my mind) high fees.

    I pointed out how much better it would be to put that money to use in simple tracker funds or even something like Vanguard Life Strategy. She responded that the University must be seen to be “guardians of the public purse” by compliance with “sober, considered investments guided by acknowledged experts”.

    How many other NGOs, quasi governmental organisations and the like are equally constrained, I wonder?

  • 27 Tedious Pseudonym September 11, 2017, 4:43 pm

    One thing that is undeniably a downside of the growth of passive investing, is that the more “passive” shareholders you have holding your company, the more you can get away with poor performance and huge rewards as a board member/CEO of these companies – or, alternatively, the more influence a smaller portion of shareholders have on these (and other) matters.

    By their very definition, passive funds don’t vote, which makes life a bit easier in the boardroom. I know what I’m aiming for in my career 🙂

  • 28 John B September 11, 2017, 5:33 pm

    @Tedious Vanguard say they want a strong presence at AGMs to represent the interests of their passive investors.

  • 29 William III September 11, 2017, 5:52 pm

    @TheBorderer: it’s truly very enthralling! Basically, what I’m saying is that we, well-off westerners, are depleting the planet’s limited resources at the cost of future generations, as well as the human rights of current but less well-off, and by-and-large out of sight, generations. Here are some links that may help:

    Intergenerational and cross-income group/social class equity:


    Human behavior & commercial interests:

    There is some fascinating economic literature on the optimal social discount rate, which I’d happy to share further links on if you like!

  • 30 The Investor September 11, 2017, 7:00 pm

    @TP — Passive funds do vote. Have a Google, or read this article on the FT for a bit more info: https://www.ft.com/content/bfc46256-51d3-11e7-bfb8-997009366969

    What I agree they don’t do is sell (except for index change reasons) which in some ways is the ultimate vote in a shareholder democracy. 🙂 Some US passive giants have been trying to style themselves as “forever funds” for this reason, and arguing they should be even more engaged than typical active investors.

    Conversely there have been calls to restrict passive fund voting for various reasons. It’s an interesting area.

  • 31 The Investor September 11, 2017, 7:03 pm

    @William III — I am concerned about both the environment and some of the inter-generational issues you’re talking about. However I nearly always put the blame on consumers / voters / people.

    We have choices, and most of us use them badly. Companies generally profit when they create stuff that matches the demand thrown up by our (often poor) choices.

    If companies could dictate this stuff we’d still all be driving around in British Leland cars and eating spam for dinner and counting ourselves lucky. In general, they can’t.

    It’s harder to blame people for their (our) stupid selfish choices, but that’s where I usually do.

    Look at the outcry against “green taxes” on energy bills for one easy example. 🙁

  • 32 Honza September 11, 2017, 8:42 pm

    @Investor “I am concerned about both the environment and some of the inter-generational issues you’re talking about. However I nearly always put the blame on consumers / voters / people.”

    And in theory I agree with you, it is our fault. But only if you ignore the fundamentally important issue of power to effect change.

    You and I as individuals have a very very very limited effect on how much un-recycalable packaging is used by supermarkets. Lord Sainsbury (or whoever runs Sainsbury) has, as an individual, an incredible amount of power over the amount of packaging that Sainsbury produces.

    Therefore, morally it surely follows that Lord Sainsbury shoulders more of the responsibility for poisening the oceans than we do, as individuals.

    With power surely comes responsibility. But that is something that modern business (and most people reading this blog) seem to reject. I think that’s very sad.

  • 33 Richard September 12, 2017, 7:02 am

    @Honza – doesn’t it come back to us ultimatly? let’s say Lord Sainsbury decides to uni-laterally make changes to packaging. He has to put his prices up to manage the change. It is now up to us again as we can vote with our feet and not shop at ‘rip off’ Sainsbury. He is taking a risk that most of us care about the environment more than we care about saving a few quid. So he doesn’t take that risk. The government – that we elect – has to legislate so all companies take the same risk. Like the successful 5p bag charge (Though did any company take the risk of doing this unilaterally)?

    The issue for me comes in whether corporations or financial institutions have enough competition or too much power. Innovation is tech is slowly breaking up the power of financial institutions – or at least giving people more choice and lower costs.

  • 34 William III September 12, 2017, 8:54 am

    @Richard: there are investors, consumers, and government – all stakeholders that Lord Sainsbury needs to please, as they are fundamental to his business’ existence (there are more, but these are most influential).

    Interestingly, investors seem to have quite strong intentions on the sustainability front, and a lot of people put their hopes on them. There’s a discussion at the moment about the ‘fiduciary duty’ of institutional investors, which is to create value for the (very) long-term i.e. the same term that its pension liabilities are due, on average a couple of decades. Add to this the argument that pension savers would proably quite like their children to be able to breath and drink clean water. This is leading some prominent institutions including Aviva, Scottish Widows, CalPERS, ABP, PGGM to use their voting power and their feet to make their preferences for CSR known. And maybe they have an impact..

  • 35 Gadgetmind September 12, 2017, 10:21 am

    Thanks for the link to the pension taper article. I’m unexpectedly going to hit full taper this tax year, and by the time I found this out I’d already done most of the £10k I’ll be allowed. I have no idea if Aviva (nee Friends Life for me) will do scheme pays but it’s unlikely.

    It really is a total sod of a system.

  • 36 The Borderer September 13, 2017, 8:52 am

    @William III (29)
    Thanks for that. Food for thought indeed.

  • 37 BB September 13, 2017, 9:17 pm

    Thanks – that’s helpful
    It really illustrates how complex things are now

  • 38 The Rhino September 14, 2017, 11:41 am

    On a tangent – is anyone here an early bitcoin holder? I just read that the crypto-moulah has appreciated 5,555,456% in a little over 7 years. That has sort of blown my mind!

  • 39 Rodcorp September 14, 2017, 3:50 pm

    @TI http://monevator.com/weekend-reading-if-the-market-is-getting-dumber-active-managers-must-be-morons/#comment-831779
    Very exciting about the book’s progress. When will we be able to buy it?

  • 40 Learner September 14, 2017, 4:53 pm

    Bitcoin, much like housing, is a constant reminder of markets remaining irrational. I remember when btc first reached US$10 and thought that was amusing, then $100 and thought that’s was insane. It is now around $4,000.

  • 41 The Rhino September 14, 2017, 5:53 pm

    I’m thinking of those winklevoss twins from the facebook movie – didn’t they create the 1st bitcoin ETF?

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