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

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 [1] 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 [2] 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 [3], but if the market is really getting stupid then more than 2% should be profiting from it. They’re not.

I love stock picking [4], 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 [5]

From the archive-ator: How to score an own goal – Monevator [6]


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 [7]

How you can get 24 days off in a row in 2018 using 14 days of annual leave – Telegraph [8]

UK insurance payouts to shrink after U-turn on lump sum formula – Guardian [9]

Smart Investor switch angers Barclays Stockbrokers’ clients [Search result]FT [10]

‘Buoyancy’ returns to UK housing market, as prices edge up 0.1pc – Telegraph [11]

First-time buyers in London gain edge over buy-to-let landlords [Search result]FT [12]

High earners face pensions tax taper shock [Search result]FT [13]

It’s taken 10 years for emerging markets to reach their pre-crisis highs – The Atlas Investor [14]

Products and services

How studying abroad could save you £50,000 – Telegraph [15]

The cost (to an index fund) of turnover in an index – Oblivious Investor [16]

How to invest your Junior ISA – ThisIsMoney [17]

‘Is my smart meter charging me for the energy generated by my solar panels?’ – Telegraph [18]

Help-to-buy scheme aids some buyers, but boosts builders even more – Guardian [19]

Comment and opinion

Darling, benchmarks are soooo last year – The Evidence-based Investor [20]

The Cobra Effect, and the risk of owning bonds – Of Dollars and Data [21]

How to be an angel investor: Interview with Jason Calacanis [podcast]Meb Faber [22]

Improving the Safe Withdrawal Rate for UK retirees – Retirement Investing Today [23]

Swedroe: Passive investing misconceptions – ETF.com [2]

Howard Marks’ clarifies his warnings about the bull market [PDF]Oaktree Capital [24]

30 obvious investment truths – A Wealth of Common Sense [25]

Now what? Presentation on the state of the market [Slides] – also Ben Carlson, via Scribd [26]

The challenges of using a funded ratio to track progress towards retirement – Kitces [27]

A thoughtful Neil Woodford on his poor recent performance [Video]Woodford Funds [28]

Why automation shouldn’t the end of employment – The Value Perspective [29]

When gold can brighten up your portfolio – Interactive Investor [30]

The fickle fortunes of market timing – Bloomberg [31]

Off our beat

The Brexit fallacy of migrants taking British jobs and driving down wages – Vince Cable [32]

Self-driving cars on their way and Morgan Stanley is down to party [Search result]FT [33]

What we get wrong about technology – Tim Hartford [34]

Few cities could accommodate Amazon’s new headquarters – Bloomberg [35]

A soft Brexiteer tells the Hard Brexiteers why they’re wrong – Pete North via Twitter [36]

Social networks: You are the product – London Review of Books [37]

A stern letter from the tooth fairy – Henry Warren via Twitter [38]

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 [39]

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [ [42]]