Thursday, 28 March 2019

Wrong objective

I was an asset manager trying to beat the market. I learned over time that this was a pointless task. Surely, investors have an objective in mind and a portfolio should be aligned to this objective. Asset managers (active ones, in particular) don't care about investor objectives. The simply want to earn the highest return. This attitude is evident in the standard active manager defense of active investing. Namely, active managers give the usual "you are guaranteed to earn below average returns with passive" and "active gives you a chance to earn above average returns" arguments. I don't buy it.

I read a great article by Craig Gradidge which talks about these defenses. Craig is a financial planner I follow and admire. He calls it like he sees it. His article is aptly titled "How active managers convinced me to invest more in passive funds" and tells the story of the flimsiness of many active managers defenses helped to include more passive portfolios in his client portfolios. In fact, Craig uses both active and passive in client portfolios.

Craig succinctly sums up his views in the last paragraph of his article (text bolded by me):
"The reason active managers convinced me that I needed to increase my clients’ exposure to passive investments going forward, is that it has become clear to me that they do not fully understand my role as a financial adviser. Their responses to the debate were to play down everything that is important to me and my clients; building robust portfolios at a good price in order to achieve clearly defined investment objectives. Active AND passive funds can help us achieve that. No client has ever asked me to outperform the market. They almost always ask how much their investment portfolio will cost."
I could never understand why so many very clever people with lots of Bloomberg screens (portfolio managers and analysts) could never deliver outcomes desired by clients. It's the old client vs fund return argument. The fact that I now understand these clever people are chasing a different objective, makes things a little clearer.

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