For me, Charley Ellis is one of the investing world’s great consumer champions. In the mid-1970s, he became the first industry insider to acknowledge that most active fund managers fail to beat their benchmarks and that investors are far better off using low-cost index funds instead. His central argument was that the rarity of consistent outperformance combined with the significant long-term impact of fees and charges meant that active investing was, to use his own phrase, a loser’s game.
I recently caught up with Charley at a Financial Market History Workshop hosted by the Newton Centre for Endowment Asset management in Cambridge and found that, 40 years on, he believes the case for using actively managed funds is weaker than ever before.
He has nothing against fund managers, most of whom he says are “extraordinarily talented.. and wonderful people”. The problem, he says, is that there are now so many talented managers out there that it’s become almost impossible – even for the very brightest – to outperform their peers with any degree of persistence.It is an interview worth reading and I concur with Robin's last point in the introduction above regarding “extraordinarily talented.. and wonderful people”. Not for one second do I believe that the average active manager is not very smart. I believe the opposite just like Charely Ellis. Where our views diverge is that I believe some form of active management is useful. This is a strategy that focuses on building a growing income stream with little to no trading of securities. To be fair, this approach is closer to a passive strategy than an active one. Shall we settle on semi-active? :).
(Side note: for those who are wondering what active vs passive is, then see this article by clicking here.)
The interview can be found by clicking here (opens in new window and takes you to Evidence-Based Investor site).