I certainly couldn’t argue with that. Weak active managers have been responsible for some of the worst breaches of professional ethics I’ve ever seen in any field. I do feel though that while passive investing has its place, it’s now become a kind of rigid orthodoxy, one which has replaced the old orthodoxy of ‘active is best’. It’s been mentioned elsewhere in this thread that nobody here’s claimed that tracking is a panacea yet judging from some of the virulent comments sparked when you even begin to question the ‘passive is best’ ethos seems to show it’s a fairly deeply-ingrained belief system rather than a cool analytical approach.
I don’t think it’s sufficient either to say that in Ireland we’re stuck with the usual suspects and I don’t deny, lots of UK & Ireland fund managers do their clients a disservice as we’re all part of the eurozone and better value can be found without resorting to rule-bending.
My main contention is that tracking indices, as it has been discussed here is an illusion. Nothing more. This was my issue with diarmuidc’s comments about no manager can beat the index and nobody can ever identify in advance who they would be anyway so track.
My point is you’re merely swapping one form of manager selection for another but rebranding it into another category to give yourself some sort of psychological security.
You’re not trying to select which manager will outperform in the years ahead but you are implicitly selecting which managers of a company will outperform in the years ahead. Now this is even more irrational if you consider that we might all profess to knowing a bit about investing but what industry-specific knowledge do we have that can help us compare one CEO of Allied Irish say to another, say Anglo Irish?
But that’s what tracking leads you into; a blind faith leap into weightings that are decided by others.
The risks of tracking are enormous but we just don’t know it and we don’t think about it in just the same way as active investors got stuffed due to safety in numbers and herd mentality.
The one common thing about Peter Lynch, Anthony Bolton is that they are effectively employees and have no real control over the inflows due to the pressures of their asset-gatherers. Owner-managers do not have this conflict.
Look at the ISEQ; top weight is Allied Irish at 16.5%, then CRH 14.8%, Bk Ireland, 13.6%, Anglo 8.6%, Ryanair 6%, Elan 5.5%, Ire Life&P 5%. That’s nearly seventy per cent of capital allocated to just seven companies. The majority of the index’s returns will be decided by just 7 CEOs. And people invest like that without any knowledge of how good those CEOs are at managing their respective businesses, they’ve just resigned themselves to this false belief that you have no possible way of identifying managers who can add value or even worse, that no manager can ever consistently outperform.
It becomes more interesting when you look at who actually holds those companies; BoI owns 6% of Allied, Fidelity own 10%, JP Morgan 2.7%, Capital Mgt 1.3%. With CRH, BoI owns 8%, Capital 8%, UBS 5%, Fidelity another couple. For BoI itself, 7% is BoI, 3% Harris, Capital 1%. Ryanair’s biggest shareholder is Fidelity at 14%, Capital again at 7%, Wellington 7% and so on.
The common thread here is that active investors actually own the companies in which you invest in passively so you’re not escaping the vagaries of manager out- or under-performance, you’re just masking this issue by passively investing. The weights are decided automatically and effectively decided by active investors! I think this disproves the argument in the first posted link to Chapter 6 which argues against active management namely:
“If Irish Life decides to buy Smurfit who can they buy them from except another fund manager ? So New Ireland must have decided to sell Smurfit. The net effect of all this is that the average fund manager can only expect average performance”
The same truly applies then to this effect on passive funds as the share price will be moved by these manager-to-manager sales, so tracking can’t really solve this problem.
I am as it happens very positive about passive investments in general and very negative about a great many active managers however I do know and think I’ve proved that many institutions do in fact select and retain active managers who consistently outperform. Just that everything has its place and all investments carry caveat emptor. Don’t take any risk you’re not being rewarded for and all that. But I do fear that passive is going to become the new dogma for the 21st century that will end in tears for a lot of people just like blind faith in active did in the 20th.
And just a final thought on asset allocation; academics dispute the amount of returns sourced from this but it must be significant. However, how do we reach that; actively, perhaps?