There’s a must-read article by Charley Ellis in the Financial Times today.
Charley, a good friend of this blog, famously wrote in the mid-1970s about active management being a loser’s game. In the latest article, Charley explains why that assessment has become increasingly true over the intervening 40 years.
I’d urge you to read the article in full, but for me, these are the highlights:
Finding alpha is becoming increasingly hard
“Like the Doppler effect of an approaching train’s whistle, the impact of professionals increasingly trading only with other professionals.. will make it increasingly hard to outperform the market they collectively dominate.”
The true cost of active management
“Try taking incremental fees as a percentage of incremental returns — both versus indexing. When you do, incremental fees for active investment management are now actually over 100% — a price-to-value ratio seldom seen.”
Asset management is an industry in denial
“Even as evidence piles up that forceful changes are closing in and threaten to confound more and more active managers, most do not recognise the reality — or say they don’t. But, as Winston Churchill once said: ‘We must look at the facts because the facts are looking at us.’”
Expect claims that ‘active is back’
“We can be sure stories will appear claiming that ‘active is back’, filled with admiring interviews of the new heroes of the sector. But, most of that will be due to focusing on the lucky winners while ignoring the equally unlucky losers.”
Beware highly selective ‘evidence’
“Clever sellers will be able to find and merchandise highly selective, semi-plausible supportive ‘evidence’. We’ve seen this movie before in the way Big Tobacco cast doubt over the evidence that smoking causes cancer or the oil industry raised doubts about climate change.”
Active management will lose its dominant position
“As indexing repeatedly earns higher returns at lower cost and with less risk and less uncertainty, the world of active management will be taken down, firm by firm, from its once dominant position.”
If only more people had listened to Charley Ellis 40 years ago.
Related posts:
Charley Ellis: Why active managers extract value from the investment process
Fees for active investing more than 100% — Charley Ellis
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
