What is fantasy and what is not
September 30th 2007 00:37
Ignorance is bliss. Not so if you are in the sharemarket, especially so when comparing active funds to a benchmark index. Most of the time from casual comparison to academic research, the cost and tax effects are left out simply for simplicity sake.
Imagine the troubles of taking tax and costs implications into account. It is not impossible but just a hassle. The assumption is that you are assumed to know about the compulsory implications.
And there are index preachers who shouts active management is a waste of time and money because active funds underperform the index. But they don't usually tell you that the benchmark index is one without the real world effects.
For a better understanding of the issue, Marcus Padley of MarcusToday wrote in the Sunday Age the line separating what is fantasy and what is not:
'And underperform they do. Of course they do. The index that they are compared to is a fantasy. It has no dealing costs when the index constituents change, no administration costs when the customers want to put money in or take it out. No rent, no employees, no wages, no tax, no stationery, no marketing, no highly experienced fund managers to keep happy in case they go somewhere that pays them more. No costs at all. The index doesn't even have customers, customer service issues, reports to send out, families to look after. In fact it has no responsibility, no risk and no pressure. It doesn't even have to pick stocks.'
[...]
'So you can't compare fund manager returns, your returns, to the index. The index doesn't exist as a business. It is an ivory tower, inaccessible in real life. Average market returns, while statistically correct, are a fantasy expectation that delivers the rest of us unrealistic expectations to which fund managers, unfortunately for them, are held.
You can only compare fund managers to fund managers, not the index. So let's stop bagging them for underperforming and start questioning this culture of telling everyone that fund managers charge too much because they underperform. It drives people to take on the investment responsibility themselves.'
If active management is so inefficient then it is simply irrational in today's ultra-competitive world for the fund managers to survive. Like evolution, they would have been phased out long time ago but they are still around and going on stronger than ever.
Please remember what is fantasy and what is not.
Imagine the troubles of taking tax and costs implications into account. It is not impossible but just a hassle. The assumption is that you are assumed to know about the compulsory implications.
And there are index preachers who shouts active management is a waste of time and money because active funds underperform the index. But they don't usually tell you that the benchmark index is one without the real world effects.
For a better understanding of the issue, Marcus Padley of MarcusToday wrote in the Sunday Age the line separating what is fantasy and what is not:
'And underperform they do. Of course they do. The index that they are compared to is a fantasy. It has no dealing costs when the index constituents change, no administration costs when the customers want to put money in or take it out. No rent, no employees, no wages, no tax, no stationery, no marketing, no highly experienced fund managers to keep happy in case they go somewhere that pays them more. No costs at all. The index doesn't even have customers, customer service issues, reports to send out, families to look after. In fact it has no responsibility, no risk and no pressure. It doesn't even have to pick stocks.'
[...]
'So you can't compare fund manager returns, your returns, to the index. The index doesn't exist as a business. It is an ivory tower, inaccessible in real life. Average market returns, while statistically correct, are a fantasy expectation that delivers the rest of us unrealistic expectations to which fund managers, unfortunately for them, are held.
You can only compare fund managers to fund managers, not the index. So let's stop bagging them for underperforming and start questioning this culture of telling everyone that fund managers charge too much because they underperform. It drives people to take on the investment responsibility themselves.'
If active management is so inefficient then it is simply irrational in today's ultra-competitive world for the fund managers to survive. Like evolution, they would have been phased out long time ago but they are still around and going on stronger than ever.
Please remember what is fantasy and what is not.
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Comment by aw
Can fund managers in more efficient markets (USA, etc) outperform ETFs (with transaction costs factored in)?
Comment by Benjamin
Benkaiser.NET Investment Portal
But of course, the arguments never end that border on obscure technicalities.