Buffett Wins his 10-Year, Million-Dollar Wager

Warren Buffett is the winner in the bet he made with finance professionals back in 2007 that, over the ten years between January 1, 2008 and December 31, 2017, the S&P 500 would outperform a portfolio of funds of hedge funds (when performance is measured on a basis net of fees, costs, and all expenses). This according to an article in this week’s AEI. Ted Seides, co-manager of Protégé Partners, was the only fund manager to accept Buffett’s challenge. The following results are outlined in Berkshire’s 2016 letter to shareholders: “Buffett’s index investment bet is so far ahead,” the article states, […]

GMO Paper Says Indexing the S&P 500 is Risky

A comprehensive  white paper published by GMO’s Matt Kadnar and James Montier in August—arguing against a predominantly index-focused investment strategy–was condensed in a recent MarketWatch article. The article quotes the authors: “A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation. At this point, you are no longer entitled to refer to yourself as an investor. You may call yourself a speculator, but not an investor.” Given the market’s stretched valuations, the paper explains, passive investing prevents an investor from underweighting […]

BlackRock’s Ang on Factor Investing

Andrew Ang, who runs factor investing at BlackRock, argues that factor investing remains “the language of investment excellence” despite naysaying by the likes of Vanguard’s Jack Bogle and smart-beta pioneer Rob Arnott of Research Affiliates. This according to a recent article in Forbes. Black Rock, the article reports, has been “firing human stock pickers and betting that factor investing is the future of the struggling active-investment-management business.” It adds that Ang expects smart-beta ETFs to reach $1 trillion by 2020, and has focused his firm’s offerings on six factors; small-size, value dividend yield, momentum and quality (for return enhancement), and […]

An Argument Against Passive Investing

As clients move dollars to passively managed funds, investment management firm Grantham Mayo van Otterloo has “remained bearish as markets have lifted valuations,” according to an article in Barron’s. But James Montier, a member of the firm’s asset-allocation committee who was interviewed for the article, “often challenges the assumptions of his boss [Jeremy Grantham] and others around him.” Following are some of Montier’s comments from the interview: Passive investing: “You cannot describe yourself as an investor if you are going passive. You are welcome to call yourself a speculator, but you honestly can’t say you care about expected returns if […]

Paul Singer on the Threat of Passive Investing

The hedge fund manager and founder of Elliott Management Corp. argues that passive strategies don’t represent investing per se and that “index fund providers don’t have incentive to push companies to change for the better and create shareholder value.” This according to a recent Bloomberg article. In his recent second-quarter letter, Singer refers to passive investing’s “apparent stability” as “unsustainable and brittle” and argues that “passive investing is in danger of devouring capitalism.” He asserts that in passive investing, small equity holders have “little-to-no voice and no realistic possibility of banding together, while the biggest shareholders have no (repeat, no) […]

Leading Economist Says Stocks Can Continue to Climb

Although U.S. stock valuations are stretched, economist and leading authority on behavior finance Andrew Lo says this can  continue for years due to growing demand for equities by retirement funds,” says a recent article in MarketWatch. Lo is director of the MIT Laboratory for Financial Engineering who also helped establish the new Office of Financial Research under the U.S. Treasury Department. In a recent interview, he asserted, “Having a large number of passive investors buying and holding index funds for the next 20 years will cause the market’s value to continue to rise.” But the issue of whether the stock […]

Shiller Says There Are No Genius Investors in the Long Run

While some investing approaches can work for long periods of time, over the long run, “without deep expertise, it makes little sense to veer much from a simple market portfolio—one that seeks to match the overall performance of the market, and not beat it.” This according to Yale professor Robert Shiller in a recent New York Times article. Using the example of Warren Buffett’s investing prowess, Shiller underscores that investors who have attempted to mirror his strategy don’t “understand exactly how he makes his decisions, they don’t have his edge,” and, he adds, “must come to the party late and […]

Vanguard Has Seen More Inflows than All Competitors Combined

In the last three calendar years, investors have poured $823 billion into low-cost index and ETF funds managed by Vanguard, about 8.5 times as much as all of its competitors combined, according to a recent New York Times article. The article quotes Morningstar’s Alina Lamy, who says this type of flow is unprecedented. “Since the crisis,” she says, “investors have been saying, ‘I may not be able to control the market, but I can control how much I pay in mutual fund expenses.’” The phenomenon, coined the “Vanguard effect,” has “come as an existential shock to a mutual industry that […]

Yale’s Actively Managed Fund Performance Waning

The majority of the Yale University endowment fund is invested with active managers but, if you compare its returns to low-cost active strategies rather than to passive indices, “Yale’s active managers don’t look so special,” writes Bloomberg’s Nir Kaissar. In its recently released 2016 annual report, the article says the esteemed university’s endowment rebutted “fee bashers” by arguing, “The important metric is net returns, not gross fees.” Kaissar points out, however, that Yale’s attempt to substantiate high fees in the name of net returns is no longer valid.  While low-cost “smart-beta” funds haven’t been around long enough to allow a […]

Does Passive Investing Resemble Marxism?

According to a team at Goldman Sachs, says an article in this month’s Bloomberg, the rise of passive investing has the effect of “rewarding corporate directors more equally than the fundamental performance of their respective businesses might warrant.” In other words, the move toward passive funds may be leading to a rise in increased correlation among share price movements which, in turn, makes it more difficult to establish to what extent returns are attributable to the fund management performance. The report claims: “Given the significantly lower turnover of passively-managed investments and the extent to which equity prices now also move […]

Active Investors Get a Chance to Shine

From the investor’s standpoint, a low level of unemployment isn’t necessarily good news, says a recent Bloomberg article. However, it can bode well for active versus passive investors. When more people are working, it says, “Wage growth can exceed economic growth, putting pressure on corporate profit margins. Interest rates can rise, tightening financial conditions. Inflation can rise, putting more pressure on central bankers to remove liquidity from the system.” For active investors, however, it presents the opportunity to outperform benchmarks, “which are much lower hurdles to beat than in the early investor-friendly stage of an expansion.” During the current, long-winded […]

Active vs. Passive Results Linked to Market Cycles

Fees contribute heavily to the variance in performance among active and passive fund managers. A recent article in Investment News says that, according to Morningstar data, “higher fees have the biggest impact on performance,” with the largest variance existing in large-cap stock strategies. The data also shows that the divergence worsens as the time period gets longer. However, the article also highlights other research suggesting that results depend on more than just fee structure. Scott Opsal, director of research at The Leuthold Group, found that the relative success of active and passive management styles can also be linked to market […]

Passive Investors Should Avoid these Three Mistakes

While data supports the widespread belief that passive (or index) and ETF investing offer consistently competitive returns, a recent article in Money magazine advises investors to avoid three common mistakes when choosing this route: Assuming all index funds are cheap: Index funds are generally able to charge lower fees since they simply buy the stocks or bonds that make up their benchmark indices (instead of spending money on manpower and research). But the article argues that not all of these funds are “bargains,” and fees can range from as little as 0.10% annually to more than 10 times that amount. It’s […]

The Passive Investing Tsunami in ETFs Continues

Investments have been shifting from actively managed funds to passively managed exchange-traded funds (ETFs) for a while now, but the Brexit vote and impending U.S. presidential election have fueled the migration even more. According to a recent CNBC article, the month of May saw an $18.7 billion exodus from actively managed U.S. equity funds and an $8.1 billion inflow to passively managed, index-tracking funds, primarily ETFs (data from Morningstar). Ben Johnson, global director of EFT Research at Morningstar, believes “it’s not a question of whether the trend continues but at what pace.” The CNBC article describes the shift as occurring […]

Follow Buffett’s Lead and Focus on Value + Quality

Investors might be surprised to know that Warren Buffett, perhaps the greatest investor of all time, is a big fan of indexing. For instance, “He has already declared that 90 percent of the money he leaves to his wife will be invested in Vanguard’s S&P 500 index fund.” But as Nir Kaissar, a Bloomberg Gadfly columnist points out, investors can glean insight into Buffett’s high quality and value portfolio at Berkshire. For example, the chart below shows that the stocks owned by Buffett trade at lower market multiple’s than the S&P and have a higher return-on-equity. Kaissar writes, “the magic […]