One of the pleasures of owning an FT subscription is an article from Toby Nangle. I sense that Toby is still finding his feet as a commentator and occasionally I wish he’d calm down (fine thing for me to say!) but article by article, he seems to be developing a style or writing which compliments the excellence of his insights.
His latest article addresses a question that I’ve often asked myself “why are there still active managers?”. The blog’s title kind of gives the game away!
Toby was an active manager at Columbia Threadneedle, so we might think he is writing t exonerate his past deeds. I know my friend Robin Powell is not going to like this, but Toby’s argument makes sense.
I do not see how I can invest my savings in active funds with any certainty of getting a better return than I do- using diversified passive funds offered by LGIM.
Many large DB plans do not take to active management, recognising the tracking error that you expect from the Beta to be an unnecessary risk. Why should sponsors of DB plans be exposed to the errors of active managers when most of the value comes from exposure to the index? These ideas have been thumped into me over the past twenty years so I was genuinely surprised to read Toby’s interview with Dr Alex Beath.
Beath is a physicist who came into performance measurement expecting to rubbish active management. But he’s found that where purchased with due diligence over price and manager, large pension funds generally get value for the extra money charged. This is particularly the case when the active manager is working in markets where value can be found (eg not large cap equities).
Toby Nangle concludes
Markets are efficient, but not perfectly so. They appear too efficient to bear the weight of mutual fund fees, but insufficiently so to justify large investors’ use of active managers. The scale of value-add is small, but highly statistically significant.
Chris Sier will be delighted, there is value in knowing what you pay as much as what you buy.