Thursday, 13 March 2008

Active rant

I'm hugely sceptical about the value of active management in a market like the UK. I've just read too many studies over the years that suggest that it is practically impossible to outperform over the long-term. Just the other day I was talking to a bloke who works for a quant house who said that some researchers had run experiment where I think they used a Monte Carlo engine to generate random fund manager performance. Apparently the dispersion of results looked exactly like the dispersion of actual fund manager performance...

Of couse there's a problem - we can't all invest passively, what would the resultant shares prices mean? And actually that would surely create opportunities for people to sensibly take an active approach. So I suppose we need active investors to ensure that prices actually make sense. But in that case aren't clients of active managers actually providing a service to the market?! Why then do they have to pay through the nose for the privelege of making the market work properly? It seems rather back to front.

Obviously if you're a pension fund that has 'selected' a fund manager that is doing 'well' no doubt you'll think that this is a load of guff. But bear in mind that someone can 'win' at a game like Deal Or No Deal too just by luck. No doubt when they do win their 'system' for opening random boxes seems very reliable too.

Active fees are not a small cost either and, as Watson Wyatt recently pointed out, investors' desire for the Holy Grail of alpha means they are handing over ever more. My hideous week in Edinburgh last week reminded me of this - all that champagne has to be paid for. At the end of the day if you are a trustee you are paying for your own 'free' tickets to the football/rugby/other sporting event identified by institutional marketing as being popular with the 'typical' middle-aged, male trustee.

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