Confessions of an Institutional Investor

My friend Josh Brown (The Reformed Broker) just published an interesting piece, Confessions of an Institutional Investor. Here’s a taste.

“I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, ‘Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.’  Somehow simplicity has become the exception while complexity is now the rule.

“I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity.  That’s not to say that it’s easy, just less complex.  A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks.  We all know hope is not an investment strategy.”

Josh concludes by asking, “What do you think?” I’m glad he asked.  What I think is linked below.

• Is the Yale Model Past It?
• The Active Management Challenge

Voting with their Feet and their Dollars

I have regularly challenged advisors to justify their use of active management. 

It seems to me that anyone in the active management business ought to be able to defend the process of active management with more than a sales pitch — y’know, with data and stuff.

Examples of my challenges and related posts are listed below.

• The Active Management Challenge
• More on the Active Management Challenge
• The Charley Ellis Challenge
• Value is Elusive
• The Value Project
• The Best of Both Worlds: Active and Passive Investing

Sadly, the challenge remains largely unmet by the investment world as a whole. However, since I favor active management for a variety of investment types and styles, The Value Project — linked above — provides my response to this challenge.

It is therefore probably not coincidental that one of every three dollars invested in mutual funds and exchange-traded funds through the first four months of the 2012 has gone to Vanguard, according to Morningstar Inc. (and as reported by Investment News).  Investment in Vanguard so far this year is roughly $65 billion, nearly four times more than the next closest mutual fund company – PIMCO.  In ETFs, year-to-date through the end of April, Vanguard had gathered $21.6 billion, while BlackRock’s iShares collected $13.3 billion and State Street added $7.2 billion. As always, Vanguard focuses on passively managed index funds and ETFs. 

It seems clear to me that many advisors are simply not meeting the challenge to active management offered by the likes of Vanguard and, as a consequence, consumers are voting with their feet (and their investment dollars).  Moreover, low fees matter, especially in a low return, low yield world.

Consumers have pretty clearly thrown down the gauntlet.  How will the active management business respond?  Will it respond?

Here’s hoping, but only time will tell.

More on the Active Management Challenge

My post yesterday challenging active investment management advocates to support their views “with data and stuff” seems to have hit a nerve based upon the number of hits it has received and the comments it has generated.  It was featured at both Real Clear Markets and Abnormal Returns too.  Obviously, I am pleased when my work is read and gets attention.  More importantly, I hope to spur discussion and further analysis of whether and how active management can benefit investors.

As of this moment, I have not seen a formal response to my challenge.  I wouldn’t expect one so quickly.  But if and when they appear, I will link to them here.

I also want to highlight those who have consistently taken great care to support (“with data and stuff”) the activist positions they hold.  Mebane Faber is an inspiration in this regard.  So is Geoff Considine.  I admire the work of Andrew Lo greatly.  I have no doubt that this list should be much longer but I also recognize that were my own knowledge broader and deeper, I could likely add many more to this list.

To all who read, think upon and write about these important matters, thank you.