The Value Project (5): Other Stuff

Even the strongest advocate of active management must concede that, as a matter of simple arithmetic, the universe of active managers will underperform the universe of passive managers.  Costs matter and passive management is a much cheaper endeavor. As Morningstar discovered, in every single time period and data point tested, low-cost funds beat high-cost funds. Factor in the added tax efficiency of passive investing (much longer holding periods and far fewer transactions in general) and it is clear that active management bears a difficult burden in the race to earn the business of investors. 

Size matters too. The more assets under management, the harder it will be for a money manager to outperform.  This is what legendary investor Michael Steinhardt called “diseconomies of scale.” As the expression goes, “elephants can’t dance.”  Accordingly, all else being equal, I will generally favor smaller money managers and those who charge lower fees.  I will also favor strategies with a higher likelihood of tax efficiency (in taxable accounts), for the same general reasons.

 

The Value Project

The Value Project (2): Commit to Diversification

The Value Project (3): The Value Proposition

The Value Project (4): Emphasize Process

The Value Project (5): Other Stuff

The Value Project (6): Recognizing Value

7 thoughts on “The Value Project (5): Other Stuff

  1. Pingback: The Value Project | Above the Market

  2. Pingback: The Value Project (2): Commit to Diversification | Above the Market

  3. Pingback: The Value Project (4): Emphasize Process | Above the Market

  4. Pingback: The Value Project (3): The Value Proposition | Above the Market

  5. Pingback: The Value Project (6): Recognizing Value | Above the Market

  6. Pingback: Value is Elusive | Above the Market

  7. Pingback: Updating the Yale Model | Above the Market

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