Active Fund Managers are Not an Anachronism

Hi Guys,

Here’s a quote from a recent survey of mutual fund investors: It said that “…. only 53 per cent of individual investors believed that outperformance was based on skill rather than luck. As for investment professionals themselves, the number was even lower, with only 42 per cent attributing outperformance to superior skill.”

Wow! Investment professionals do not believe in themselves in about 58 % of the instances. If an industry doesn’t trust its own proficiency, it is doom to failure in the long term. But, the same article that contained the referenced quote also offers some saving possibilities.

An indirect reference was made to this reporting in an earlier MFO post. The title of the piece is “Investment: Loser’s Game” by John Authers. Here is the Link to the Financial Times article:

http://www.ft.com/cms/s/0/f15a1f9c-876c-11e4-8c91-00144feabdc0.html

The 6 minute video that is embedded in the article provides an excellent summary if you are not now inclined to read the work.

Basically, the article reviews the recent dismal annual performance of active mutual fund management and their coupled lack of persistency. These are not new findings and need not be repeated for MFO Discussion members.

However, the article does offer 3 ways in which a performance reversal can be possibly accomplished, and with it, a directional money flow change back into actively managed funds.

The three pathways are: (1) Become more actively focused away from benchmark holdings (more concentration), (2) A reduced money management and cost fee structure, and (3) Enrollment in a money management training program directed at removing behavioral biases that compromise money management performance (like overconfidence).

The first two of these elements have been recognized for quite awhile; I was not familiar with the training program opportunity. More power to it, especially if it translates to better returns for us average mutual fund buyers.

The fees burden is obvious and demands attention. Even Charlie Munger attacked it decades ago. I’m currently reading “The Best of Charlie Munger, 1994-2013”. It is fun reading with great practical wisdom. You might want to give it a try. Here is one sample story.

In a talk that Munger gave to a Philanthropy Round Table in November, 2000, his true feelings towards the investment advisor cohort in general is harshly revealed. He doesn’t think much of that group.

Munger likes to invent words. He invented one for the investment advisors; it is “febezzle”. The “fe” portion acknowledges the high fees charged by the investment fraternity. The “bezzle” portion is a shortened form of embezzlement. Munger’s overarching assessment is that these financial wizards are mostly frauds and do not add to an investor’s wealth.

He did pontificate that these advisors and their clients did increase overall National spending. The advisors made and spent money directly from clients, and the customers were encouraged to spend more believing that they were making more market money. This hidden action increased our total economic pot in a Keynesian spending multiplier manner. According to Keynes, money need not be spent efficiently to enhance our National wealth.

I’m not sure I buy into that deep logic. Regardless……

Best Regards.