Ken Fisher doesn’t mince his words. Personally, I’ve not been able to take him seriously since his extraordinary diatribe in the FT in October 2014 in which he described proponents of evidence-based investing as “deliverers of drivel.. communists at heart, (who) disbelieve in markets and will surely rot in hell”. It’s easy to see why the media loves him.
Ken, the founder and CEO of the multi-billion dollar money management firm Fisher Investments, rarely misses an opportunity to have a dig at anyone who dares to take an opposing view, and he was true to form again last week.
In an article headed Passive investors, the Loch Ness monster, and other myths, Fisher essentially argued that passive investing is so hard that you shouldn’t try it.
“Emotions make passive investing all but impossible for most folks,” he said. “In bull markets, greed makes people ditch broad tracker funds for hotshot sector funds. When volatility hits, fear triggers fight-or-flight instincts, and flight usually wins.
“If you have amazing discipline and can really buy something and hold it for the long run, passive is great. But if you let today’s scare stories impact you, it’s a recipe for cutting your toes off. You’re on your own, with no one to coach you through volatility.”
Nobody said evidence-based investing was easy. Yes, it’s a simple philosophy, but can be difficult to stick to. That’s why the vast majority of people need professional help with it. What, I wonder, does Ken Fisher think financial advisers are for?
Yes, it’s at times like this, when markets are volatile, that indexers are tested. But it’s no different for active investors. It’s part of the folklore of active management that active funds are best when markets are falling, and that they somehow provide “downside protection”. True, most active funds hold an element of cash or bonds, but as a diversified investor, you should be doing that anyway. The data clearly shows that, when properly compared, passively managed funds have the edge over active funds in bear markets as well as bull markets.
What’s more, my experience is that investors who truly understand and embrace the evidence-based approach are far less likely to give in to their emotions during choppy markets than those who try to time the market or pick and choose actively managed funds.
I speak to evidence-based advisers all the time. What they tell me again and again— and what they’ve repeated in recent weeks — is that they actually receive very few calls or emails from anxious clients during market downturns. Those clients have had it explained to them how markets work. They know to stay disciplined and to tune out the noise. They know to keep their heads when all about them are losing theirs.
To try to support his argument that passive investors can’t keep their heads, Fisher suggests that January was “a passive investor bloodbath”. In the first three weeks, he points out, $12.8bn fled equity ETFs. But in equating ETF investors with passive investors he is making a big mistake. Yes, ETFs do enable investors to capture the returns of entire asset classes at low cost. But increasingly they’ve been hijacked by the fund industry, which wants to sell us actively managed versions instead.
More importantly, ETFs aren’t used to buy and hold. In the first nine months, of 2015 the 100 largest ETFs in the US, valued at $1.5 trillion, were traded at an annualized turnover rate of 864%. To quote Jack Bogle, ETFs seem “designed to provide a new way for short-term speculators to trade to their hearts’ content”. That has nothing to do with passive investing.
Sure, there are passive investors who will fail this test of nerve. They will crystallise their losses and their returns will suffer. But the suggestion that so many will capitulate that successful passive investing is a myth is complete balderdash.
Ken Fisher knows all too well what the real myth, the real Nessie, is — the idea that paying high-fee active managers is the best route to investment success.
In his homeland, the US, investors are turning away from the high-fee actively managed funds that Fisher advocates in their droves. When properly presented with the evidence, as opposed to the usual marketing rhetoric, I’m sure investors in the UK and elsewhere will reach the same conclusion.