Drivel is Drivel – whoever says it

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.

Here is his most recent article on the subject and here is a comment from a former active manager who is convinced by the evidence

Screenshot 2019-07-11 at 06.51.48.png

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.

The plank

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.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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9 Responses to Drivel is Drivel – whoever says it

  1. con keating says:

    I am most intrigued by that diagram. In particular, the right hand end, where theauthor had managed to reverse time – a novel and unique power in my experience. This reversal surprisingly does not retrace history but travels on a different path – one which is initially lower and increasingly divergent from history. Indeed extrapolation further back, over the periods of low activity/value, would offer a novel strategy. We should not then invest but rather wait until we reverse time and invest only then, with the result that we would then have been massively better off but exposed to a steady decline as the passage of time resumes its normal direction of travel…

    Twas brillig, and the slithy toves
    Did gyre and gimble in the wabe:
    All mimsy were the borogoves,
    And the mome raths outgrabe.

    “Beware the Jabberwock, my son!

  2. Robert Davies says:

    Most stuff written on finance is drivel.

    Once you understand the importance of compound interest the only really important issue to analyse is tax and its implications.

  3. George Kirrin says:

    In my experiences of at least one of the master trusts with which Richard is associated, he is also a believer in so-called “risk adjusted returns”.

    The counter-argument, exemplified by Warren Buffet and others, comes in two parts.

    Firstly, risk is not a statistical phenomenon pertaining to volatility in stock prices, but instead is a fundamental attribute of the companies in question to be invested in or avoided.

    For example, the price of the Coca Cola company stock (KO.NYSE) usually has low volatility, because its products are in high demand regardless of the vagaries of the economic cycle. If the price of KO.NYSE is suddenly cut from around $50 per share to $25 during a market panic, it will become a bargain.

    Because they can now purchase the stock so “relatively” cheaply, new investors will have less “risk” of failing to meet their long-term financial goals (Buffett’s operational definition of risk).

    A believer, however, in modern portfolio theory, like Richard apparently, should conclude the exact opposite. Because prices are assumed to discount all available information, the new price of $25 isn’t a bargain – indeed, by definition bargains cannot exist. Moreover, the sharp drop in price has increased the estimate of price volatility – accordingly, the stock has become “riskier” than before and thus should be less attractive, all else being equal.

    The second piece of the counter-argument is that savvy investors can identify and profit from temporary mismatches between current market prices and estimated intrinsic value (or “fair value” before accountants and actuaries hijacked the term to equate it with current market prices, thus creating a tautology which helps no one), such as a fall in price of KO.NYSE during a market panic. The performance of Mr. Buffett’s and others’ investments over the years lends these arguments some support.

    As for the popular, but to my mind stale, argument about so-called “active” versus market index “passive” investing, I simply refer you to a growing number of critical articles about the “tyranny” of market index benchmarks. Sadly, Richard is not alone there among the tyrannised.

  4. Doug Brodie says:

    There is a common ploy in aggregating all active funds which is an error. Excluding the lumpy morass of zombie funds and multi-distributor default funds (think banks and pensions) one then needs to consider the universe – it’s a fruit basket, and there is no similarity between Scottish raspberries and paw-paw.

    I get bored saying this but whereas the US struggles to get active funds above the S&P, that is not the case regarding the FTSE and UK funds. Yes there’s dross, but that’s why we have questioning brains, keeping your investing feet off the bottom is not hard to do.

    More importantly, almost all investors in our peer group, anyone connected to pensions, start from the wrong place. You can’t find the right answer if you ask the wrong question.

    Never has an investor in any main FTSE index failed to get a positive annual return.

    If you own your firm, your own small business or sole tradership, you pay your bills by selling off parts of the business each year – its all about turning cashflow into distributable profit, and that pays your income each month. So with holding a portfolio of UK equities to match current and future pension liabilities – use the income. The FTSE100 is scheduled you distribute £100bn in income this year (, so if a 5% return is what’s needed who cares about the index value?

    It is a bit of a coincidence but our white paper on precisely this is published tomorrow, I’ll send Henry a copy to pick apart (why do I think I should have done that in advance?). The central tenet of our research is that MPT is not fit for purpose for people, only for multi-generational fund managers, and that it is wrong to conflate the risks and returns of income and capital when evaluating investment strategies.

    Specifically, shrinking down the pension scheme requirements relating to this article, we examine the effects of various annual withdrawals across 4 different investment strategies – UK Index, MSCI World Index, 60/40 mixed and then 100% equity using investment trusts.

    Some people won’t be pleased with the output of the research tables.

    For Joe Public, pensions are monthly payments, not pots of money, and the industry would serve all well to keep that in mind, especially with 10 yr gilts at <0.75% and $12 trillion in negative yielding accounts. Yesterday's income has all gone, today's pensioners can only invest in today's assets.

    • Robert Davies says:

      “Never has an investor in any main FTSE index failed to get a positive annual return.”

      Without specifying a time frame that comment is more drivel, certainly over 1 year periods the index has given a negative returns.

      “If you own your firm, your own small business or sole tradership, you pay your bills by selling off parts of the business each year – its all about turning cashflow into distributable profit, and that pays your income each month”

      Incorrect statement, no one grows their business by regularly selling bits of it.

      • Doug Brodie says:

        The comment was about income, not growing a business, the point being the error in conflating income and capital, as you have done.

        You can fudge your capital, you can’t fudge your cashflow (even though Pat Val tried hard).

        I think you are confusing investor trades with dividend income – no FTSE main index has ever failed to pay an income. investors in the indices can only lose money if they choose to sell at a price lower than they paid. Investors create losses, not the markets.

        Beware of puddles.

  5. DaveC says:

    Annnd, it’s gone…

  6. Pingback: the death of active management will be long and slow ⋆ The Passive Income Blogger

  7. Would it be true to say that active fund managers have the *opportunity* to out-perform passive funds in a down market because they can choose to be less than 100% invested, an option denied to passive funds? Whether active funds actually do manage to do so is a moot point (I suspect they do not because market timing is generally considered to be impossible).

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