d) ESMA, the European Securities and Markets Authority, in 2019, said actively managed funds clearly produce higher costs to investors than their passive peers, while equalling them in terms of gross annual performance, or even under-performing.
But there is a different view. Hendrik Bessembinder is a professor at Arizona State University who wrote two years ago that 96% of shares do no better than US Treasury bonds.
He calculated every single stock in the index for 90 years from 1926 to 2016. Only 1% of shares, of the 26,000 he looked at, made phenomenal money, while 3% made a bit.
The rest did not make anything at all less than if investors had gone into Treasury bonds. Some people think Bessembinder’s research means they might as well be in a tracker because almost no one will hit on winners — there being so few of them. But in fact this is why active management is a good thing.
Imagine a share comes into the index at 100p then over the next five years it rises to 200p. Then over the next five years it drops back again to 100p, at which point it departs from the index.
Bessembinder would count that share as showing a 0% gain, given its time in the index. But an active manager, one with skill, could have bought the share at 100p when it came in, held it for five years, and then sold it for 200p.
His profit is 100%; Bessembinder with the same share made 0%.
Unfortunately most active investing is no longer about taking long-term risks in definable investment projects.
It is more about free riding on the market return at minimum cost; participating in an expensive zero-sum arms race of better, faster, smarter analysis; shuffling risks around through financial engineering disguised as value creation, and confusing people on costs.
But there is an alternative: where they have unconstrained mandates; where regulators cut some slack; where they look to the long-term; where they have concentrated portfolios; where they do not hug benchmarks; where the fee structure is performance-driven rather than based on the value of funds managed; and where they don’t have to kowtow to investment consultants.
These are the genuine active managers. But the real question is: will the asset managers give them the mandates?
