I read articles by Jack Bogle and Warren Buffet and John Kay and Terry Smith because I like to understand how money can be managed on my behalf better. I like to improve my understanding.
And occasionally I read drivel.
I have just read the most stupid article on asset management. You can read it here.
Its author describes himself as
A leading professional trustee who knows stuff and gets stuff done in pensions, investment and governance.
That is indeed the case.
The author, Richard Butcher has been chair of the PLSA, a member of the IDWG, he’s a Governor of the PPI and Managing Director of Pitmans Trustees Ltd.
He is undoubtedly a very influential man and gets a lot done;- and yet he trots out total drivel.
Here is the central thesis of the article. The author suggests we are walking the plank
I’ve drawn this picture to help to describe the plank.
The blue line shows the shape of the normal economic cycle. The economy and market – albeit on a slightly different time frame and in a more volatile manner – falls, bottoms out, grows, peaks, falls and so on, ad infinitum.
The red line shows what has happened to the economy and market recently. It has continued to grow. We are on a plank.
Now, as sure as eggs are eggs, we will fall off the end of the plank at some point. There’s just no telling when.
Why is this relevant to the active v passive debate? Because of the rule of thumb in the Pensions Insight blog . Passive funds tend to do better in rising markets, active funds better in falling markets. The conditions for passive funds have been benign for an unusual length of time.
There is no evidence for this sweeping statement. It is purely based on the personal prejudice of the author.
And there is no evidence to confirm that passive funds produce better outcomes than passive funds in rising markets or that active funds produce better outcomes in falling markets.
But this cod logic comes up with a conclusion
So yes – over recent past passive funds in general have probably done better than active. The argument, however, will swing at the point we fall of the plank. (sic)
Probably? Has the author looked at the evidence?
About the only consistent data there is , is that the more you allow a fund manager to take money out of your fund to manage it, the less there is likely to be when you want your money back.
The evidence based investor Robin Powell, has assembled a massive archive of evidence that demonstrates conclusively that active management does not deliver good outcomes.
Which is why most fiduciaries do not take risks with other people’s money and stick with passive strategies.
Where we can employ asset management is to improve governance , asset managers can improve governance without trading stocks – and they do. If asset managers stuck with ensuring the assets they managed – were managed better – then they would be worth their salt.
Many passive managers – like LGIM and Hermes do just this.
But this is not what Richard Butcher is talking about when he offers us his very general rule of thumb;- that in a rising market passive funds will do better whereas in a falling market active funds will prevail.
He calls on fellow trustees to
“be agnostic in the debate. Their strategy should be based on investment objectives rather then (sic) personal prejudice. One challenge for trustees, however, is to find dispassionate advisors”.
Even when we are walking the plank?
In a short article the author displays his personal prejudices, calls for dispassionate behaviour and tells us we could be walking the plank (without an active management safety net). Trustees should be both agnostic and evangelical, starting with passive and ending goodness knows where.
All other things being equal, which they rarely are, trustees should be agnostic on the philosophy but evangelical on costs. In other words, passive is the proper starting point.
Whatever principle survives this bizarre conflation of arguments is finally exposed as secondary to the whims of sponsors.
” in a defined benefit world, it is the employer who bears the costs of our (trustee) decisions. This means that they should have a say, assuming their covenant is up to it, on investment approach. We may decide on balance to go passive, but if they want us to go active, for whatever reason, and they are willing to pay for it, we should go active.
I do not normally read drivel , I read this only because a friend sent me the article with the following comment
How does he get away with writing such shit?!?! The guy understands nothing. In any given day, wherever the cycle, soaring returns, bumping along or plunges, there is a benchmark return. There are passive traders in the market and active traders. The passive traders return the benchmark minus low fees. The active traders in aggregate return the benchmark minus higher fees. The end.
Whether the markets are rising or falling, in aggregate active returns less than passive. Why is this so hard for people to understand?
I think we just need to take a deep breath and recall that this jerk is being paid £1000/day by pension scheme members to be lazy, stupid and wrong. And he is the chair of the trustees’ trade body.
The answer is that Richard Butcher gets away with it because no-one calls this drivel- drivel.
Richard is a first class operator but he is not a strategist. He should stick to the knitting and not design the patterns.