Benchmark indifference is demand flow critical…old hat not new!

I was just reading an article in the Canadian Investment Review, “Time to toss your benchmark to the curb”, which discussed the performance of benchmark indifferent managers and the out performance of fundamental indexing versus traditional market cap indexing.  Now if you have been stuck in some efficient market nirvana for the better part of your working life you might find this all a bit of a shock.  But this is old hat , not new!

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Active management outperforms–fact or fiction…

The mutual funds industry has recently latched onto some recent research that has stated that active funds out perform and is using these arguments to sell its active funds while ignoring the fact that not all active funds are the same and that most of its advisors, who operate under loose professional and ethical standards, lack the expertise, ability and accountability to deliver.

There is a rationale that states that deeply active managers are more likely to outperform and the more active they are the greater the probability of out performance.  At a physical level this is likely true if we equate deep active with contrary and assume that deep active is a small minority and is playing off the index-like active/inactive majority. 

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When two universes collide – the “Active Versus Passive” debate

Allocating to hedge funds for the ordinary individual and for most financial advisers/advisors is as easy as passing through the eye of the needle

In the passive active debate there is a duality, two universes living side by side.  And by this I mean we have those who say that active management is a zero sum game and worse when fees and transaction costs are taken into consideration.  On the other hand we have those who say that active management is not a zero sum game and that value can be added even after fees and transaction costs are taken into account.   Interestingly academics have taken both sides of the debate.

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On the economic consequences of indexing..

There has been some recent comment on a 2010 NYU research paper into the “Economic Consequences of Indexing”.

My take, and it has been my take for a long while, is that passive benchmarking strategies need to pay more attention to significant valuation/allocation differentials and to expand the operational parameters of their benchmarks to manage these risks. This does not mean active management and it is risk focussed rather than return focussed.   To expand further with a few points might be worth while.

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Free rides in index land…but active managers are not really pricing, or being priced effectively.

I was passed along (hat tip Ken Kivenko) an interesting blog commentary on index funds and the free rides they were taking on the back of active fund managers.  It also pointed out that passive investing was skewing the market: .

Briefly, there are a few comments I would like to make.

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We cannot change what is… but we can certainly plan for much of what is….

Markets react daily to news, but most of the news, in truth, is already baked into the pie.

Daily data points can easily move in ways that are at odds with the overall direction of underlying fundamentals, and, of course, everyone interprets that information differently.  Many minds have differing agendas and it is quite often the agenda that defines a data point’s interpretation.  Much of risk is therefore driven by irrationality and agenda, and even rationale exploitation of irrational acts.

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Past Success…is in the past!

I am piggybacking off a Dan Solin article here which picked up on a Morningstar article about the inclusion of actively managed funds in portfolios. 

And from the Morningstar article the following quote is relevant:

Investors can easily have the best of both worlds—topnotch actively managed funds and low-cost index trackers–in their portfolios.” Continue reading