“Purity” in passive investment management

Portrait of John Keats by his friend Charles B...

Portrait of John Keats by his friend Charles Brown, 1819 (Photo credit: Wikipedia)

Investing is hard. There are no shortcuts. Markets are generally efficient and when they aren’t there are plenty of people digging up the value ahead of you.

My  anti – view is that “winning” investment strategies have negative capability. Negative capability is a literary term invented by John Keats which he describes brilliantly as a state

when a man is capable of being in uncertainties, mysteries, doubts, without any irritable reaching after fact and reason

The ability to just give in to market forces allows the investor to benefit from its perfection. I have only once come across an investment strategy that strove after such negative capability, it was articulated by  Yves Choueifaty , President and CIO of TOBAM.

TOBAM is an investment strategy which perfectly expresses this perfect passivity since it aims to weight the portfolio with the stocks in a given market without any prejudice or bias.

Extreme passivity creates what Keats refers to as

the sense of Beauty (that) overcomes every other consideration, or rather obliterates all considerations

You may consider my transference of Keats’ sense of beauty into what Yves Choueifaty  calls “maximum diversification” as fanciful. I do not think it is; – “negative capability” is a term that can equally describe both a perfect market and perfect beauty. Both are difficult.

Which brings me to the destruction of that perfection, the operational wrecking ball we take to pure passivity when we attempt to operate investment strategies through sub-optimal mechanisms.

I have spent some time this week studying a report on the different ways in which pension funds can invest in passive strategies and have come to the conclusion that pension people have been very lazy in getting to grips with the dark arts of the index manager.

If you are interested in how that perfect idea- a pure index – can be delivered with minimum disruption to maximise your retirement you should read this excellent report by Evrcore Pan Asset  which looks at the differences in outcomes created by ETF‘s and pooled indexed funds.

I am not overly interested in beating markets- I believe markets are ultimately unbeatable and my torpid conclusion is that if you can’t beat them- index them. Creating the perfect index involves the extreme passivity that Keats refers to as negative capability. Delivering this perfection without operational interference requires skill and application.

This area of investment is of interest to everyone but of particular interest to those who research DC defaults. These DC defaults have “fee budgets” constrained by the imputed cap of charging either from competition, regulation or both. These charging constraints concentrate the mind to finding the minute advantages that can be mined from this cold and unyielding stone.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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