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Active versus Passive - is Bob Veres on to a new trend?

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  • Active versus Passive - is Bob Veres on to a new trend?

    Pretty interesting article examining the opportunities afforded by the current herd mentality that "passive is a no-brainer". Fwiw, I am agnostic on either/or as articulated ad nauseum in comments on this forum and my blog. Naturally, you can draw your own conclusions, but I'd be interested in the perspectives of some of our most eloquent participants.

    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

  • #2



    Pretty interesting article examining the opportunities afforded by the current herd mentality that “passive is a no-brainer”. Fwiw, I am agnostic on either/or as articulated ad nauseum in comments on this forum and my blog. Naturally, you can draw your own conclusions, but I’d be interested in the perspectives of some of our most eloquent participants.



    Click to expand...


    Link?

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    • #3





      Link?
      Click to expand...



      So sorry - I was sure I included the link, but you know how that goes. Edited to include.
      Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #4
        “Everything that is happening that is bad for our business will be good for our investors and our investment results in the long run,” he says. “For a firm made up of investors in our own funds, we’ll make a lot more money from ten percent better results than ten percent more assets under management. For us, this period of asset flows into passive funds is wonderful, and let it go further.”

        I'm known more for my dating advice than eloquence, but here's my take.  I'm not following the logic in the above quote from the opening.  Assets are flowing out of actively managed funds (that's bad for them) and into funds that have exposure to the same stocks they did before but now own others that diversify away risk.  I wonder what the record is for this discrete cadre of active stock pickers who *really* know how it's done and who aren't about marketing.  It's nice to say that they'll make more from 10% returns than 10% more AUM (which is highly debatable and depends on the amount invested), but it's another thing to achieve that on a sustained level.  History has not been kind to those holding these beliefs.  Many of the examples they give use flawed logic.  If I'm a passive index investor then the subtleties of ETF failures are meaningless to me.  Might someone make money off a snafu where an ETF owned something it shouldn't have and prices become out of whack?  Sure.  I thank them for keeping the market efficient for me.  But that helps the active manager in the short term, not the investor over the long haul because of fees and other decisions that weren't so rosy.  I agree with the concern about market inefficiency the more people do index investing, but greed will always be there to capitalize on any opportunity created and keep the market alive.  Most of this seemed like a sales pitch with poor/no data backing the assertion that "active management is where it's at!"

        Comment


        • #5
          Possibly so. This article was interesting food for thought (to me). Whenever an idea becomes hyper-popular (passive-is-unequivocally-best), we begin to see pushback a la regression to the mean. The article was not a "study" per se, rather a compilation of opposing opinions.

          The original path that led me to this compilation included this article and another that I cannot seem to locate. This unlocated article divided active managers into the 90% who garner most of the attention and spend oodles of money on marketing to the herd who are seeking the latest, greatest "innovations" in cutesy new products. It's is the 10% who quietly spend time on research seeking alpha who may be able to differentiate their returns. Note the list in the linked article - some of the managers have been good to our clients (in the old days before we changed to passive funds).

          Again, I am agnostic in the debate but I believe Veres has dug up some interesting information.
          Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

          Comment


          • #6
            Okay, I'll take the bait. I do own some active funds, and DFA funds, non-index/passive, make up a significant percent of my net worth. If you could get good active management for the same cost as indexing, it would be a discussion worth having. Since you can't, low fees and low turnover (especially in a taxable account) win out.

            Additionally if you could predict which managers will consistently outperform their benchmarks, it might be worth discussing, but you can't.

            Also, if there was convincing evidence that active management could protect you in a downturn, it might be worth discussing, but there isn't such evidence.

            So what we are left with is the best case against investing funds is that everyone is doing it.

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            • #7




              Okay, I’ll take the bait.

              Also, if there was convincing evidence that active management could protect you in a downturn, it might be worth discussing, but there isn’t such evidence.
              Click to expand...


              Understand that I'm not arguing for either side. I do, however, greatly respect Bob Veres.

              Curious as to your statement about protection in a downturn. What difference does active v. passive make? And what kind of protection are you looking for in a downturn (aside from being protected from the greatest enemy of investors, his emotions)?
              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8







                Okay, I’ll take the bait.

                Also, if there was convincing evidence that active management could protect you in a downturn, it might be worth discussing, but there isn’t such evidence.
                Click to expand…


                Understand that I’m not arguing for either side. I do, however, greatly respect Bob Veres.

                Curious as to your statement about protection in a downturn. What difference does active v. passive make? And what kind of protection are you looking for in a downturn (aside from being protected from the greatest enemy of investors, his emotions)?
                Click to expand...


                One of the traditional arguments in favor of active management is that it will protect you in a downturn. There is a lack of evidence to support this claim.

                Comment


                • #9
                  Chasing α without β...I do get a kick out of seeing the upside/downside capture of some active funds, like, say, OPGIX, and then see its 5.75% load and 1.19% expense ratio. Lots of longevity risk, with its sole manager having been there nearly 22 years...

                  http://performance.morningstar.com/fund/ratings-risk.action?t=OPGIX&region=usa&culture=en-US

                  Comment


                  • #10


                    One of the traditional arguments in favor of active management is that it will protect you in a downturn. There is a lack of evidence to support this claim.
                    Click to expand...


                    I confess ignorance to that line of reasoning - how is active management supposed to protect anyone in a downturn? Just trying to learn.
                    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                    Comment


                    • #11





                      One of the traditional arguments in favor of active management is that it will protect you in a downturn. There is a lack of evidence to support this claim. 
                      Click to expand…


                      I confess ignorance to that line of reasoning – how is active management supposed to protect anyone in a downturn? Just trying to learn.
                      Click to expand...


                      This article sums it up nicely:

                      http://www.evidenceinvestor.co.uk/having-your-cake-and-eating-it-the-myth-of-downside-protection/

                      Comment


                      • #12


                        Click to expand…


                        This article sums it up nicely:

                        http://www.evidenceinvestor.co.uk/having-your-cake-and-eating-it-the-myth-of-downside-protection/
                        Click to expand...


                        Ah! Again, that is a new one to me. Totally irrelevant to our investment philosophy, but, in the words of the immortal Paul Harvey, "And now [I] know the rest of the story!" Thank you.
                        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                        Comment


                        • #13
                          I think a variation of this active vs passive idea would be tax-loss harvesting if one really wants to minimize downward losses.

                           

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                          • #14
                            What would actually happen if we saw another 50% market drop like 2008-2009?

                            How much would the market have to drop before there was a 'rush to the exits' by passive investors?

                            Imagine a scenario where Vanguard had to sell 10% of it's VOO (S&P 500) fund because investors ran for the exits and wanted out. You could have a large reduction in principal while simultaneously receiving a capital gains bill at the same time for the shares that Vanguard had to sell. That would make the situation worse (where would you come up with the money to pay the capital gains tax bill? Might you have to sell more shares?)

                            Any money in a IRA wouldn't have the capital gains problem so that might limit the risk. It would only be taxable accounts impacted.

                            Comment


                            • #15




                              What would actually happen if we saw another 50% market drop like 2008-2009?

                              How much would the market have to drop before there was a ‘rush to the exits’ by passive investors?

                              Imagine a scenario where Vanguard had to sell 10% of it’s VOO (S&P 500) fund because investors ran for the exits and wanted out. You could have a large reduction in principal while simultaneously receiving a capital gains bill at the same time for the shares that Vanguard had to sell. That would make the situation worse (where would you come up with the money to pay the capital gains tax bill? Might you have to sell more shares?)

                              Any money in a IRA wouldn’t have the capital gains problem so that might limit the risk. It would only be taxable accounts impacted.
                              Click to expand...


                              Please explain what you mean by the "large reduction in principal".

                              To answer your question, at least for our clients, business as usual. They would have no need to sell, given that all money invested is long-term, according to plan. And, given that the majority of investments are tax-deferred or grow tax free (Roth's), no tax bill.

                              But if a client has enough wealth to have a significant allocation to a taxable account, they can almost certainly find a way to pay the tax bill whike increasing basis in the taxable account (at preferred LTCG rates, I might add). After all, that's what planning accomplishes - pre-considered solutions to cover such scenarios. For most, the larger problem would be finding enough cash to invest more at fire-sale prices.
                              Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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