active investing: rest in peace or resurgent...
TRANSCRIPT
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ACTIVEINVESTING:RESTINPEACEORRESURGENTFORCE?
AswathDamodaran
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TheActive/PassiveDivide
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JackBogle,theGreatestDisruptor?
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TheDisruptionPaceQuickens
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Andthefundflowsbackitup
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1.ActiveInvestingcannotcollectivelybeatthemarket… here’swhy..
¨ During2015,forinstance,about40%ofinstitutionalmoneyinequitieswasinvestedinindexfundsandETFsandabout60%inactiveinvestingofalltypes.
¨ ThemoneyinvestedinindexfundsandETFswilltracktheindex,withaverysmallpercentage(about0.11%)goingtocovertheminimaltransactionscosts.
¨ Thus,activemoneymanagershavetostartoffwiththeacceptancethattheycollectivelycannotbeattheindexandthattheircosts(transactionsandmanagementfees)willhavetocomeoutoftheindexreturns
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Andtheydon’tcomecloseindeliveringreturns..
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Orinbeatingtheirpassivecounterparts
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2a.Andtheunderperformancecutsacrossstyleclasses
Aswath Damodaran
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2b.Andacrossgeographies..
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3a.Thereisnoconsistency..Winnersdon’tstaywinnersforlong
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3b.Andsuperstarmanagersfadequickly..
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ActiveInvesting’slastgaspdefense..
1.84
2.272.42
1.90
2.62
1.91
1.33
1.62
1.87
1.57
1.82
1.611.521.52
1.80
1.07
1.541.37
1.211.341.29
1.51
1.30
0.00
0.50
1.00
1.50
2.00
2.50
3.00
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
BerkshireHathaway:TheFadingBuffettPremium
P/BVRatio MarketCap BVofEquity
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TheFutureofActiveInvesting
Aswath Damodaran
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¨ Theactiveinvestingbusinesswillshrink:Feeswillcontinuetodropbutmarketsharewillalsocontinuetodecline.Itwillbelessprofitableandhirefewerpeopleasanalysts,portfoliomanagersandsupportstaff.
¨ Moredisruptioniscoming:Thebusinessesthataremostripefordisruptionareoneswherethebusinessisbig(intermsofdollarsspent),thevalueaddedissmallrelativetothecostsofrunningthebusinessandwhereeveryoneinvolved(businessesandtheircustomers)areallunhappywiththestatusquo.Thatfitstheactivemoneymanagementperfectlyanditshouldcomeasnosurprisethatthenextwaveofdisruptioniscomingfromfintechcompanies
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TheDarkSideofPassiveInvesting?
¨ CorporateGovernance:Thecritics ofpassiveinvestorspointtothefactthatVanguardandBlackrockvotewithmanagementmorethan90%ofthetime.
¨ InformationEfficiency:Activeinvestorscollectandprocessinformation,tryingtofindmarketmistakes,theyplayaroleinkeepingpricesinformative.Thisisthepointthatwasbeingmade,perhapsinartfully,bytheBernsteinpieceonhowpassiveinvestingwasworsethanMarxismandleadingtoserfdom.
¨ ProductMarkets:Therearesomewhoarguethatthegrowthofpassiveinvestingisreducingproductmarketcompetition,increasingpricesforcustomers,andtheygivetworeasons.¤ Thefirstisthatpassiveinvestorssteertheirmoneytothelargestmarketcap
companiesandasaconsequence,thesecompaniescanonlygetbigger.¤ Thesecondisthatwhentwoormorelargecompaniesinasectorareownedmostly
bythesamepassiveinvestors(sayBlackrockandVanguard),itissuggestedthattheyaremorelikelytocolludetomaximizethecollectiveprofitstotheowners.
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YourChoices
¨ Shouldbeanactiveorpassiveinvestor?Thereisnooneanswerthatwillfitallandeachofushastomakethejudgmentthatbestreflectsus(bothintermsoffinancialstandingandpersonalcharacteristics).
¨ AsIseeit,youhavethreechoices:¤ Gopassive:Decideonhowmuchriskyouwanttotake,diversifybroadlyand
holdindexfunds/ETFstomatchyourriskprofileandcashflowneeds.¤ Goactive:Thiscanrangethespectrumfrommarkettimingtostockpicking,
shorttimetolongtimehorizonsanddifferentinvestmentphilosophies.¤ AHybrid:Youcanmixactiveandpassiveshiftingfromonetotheotherover
timeorusingoneforonepartofyourportfolio(pensionfund)andanotherforadifferentpartofyourportfolio(savings).
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Herearemine..
¨ Iamanactiveinvestor ontheportionsofmyinvestmentportfoliothatIcancontrol.MyjustificationisnotthatIhavebetterinformation,canprocessthatinformationmoreefficiently(invaluationmodels)orthatIhavespecialinsightsonmarkets.
¨ Ihavetwofactorsworkinginmyfavor:¤ Iunderstandandgetalongwithmyclient.Iinvestformyself.¤ Ihavefaith invalueandthatmarketpricesconvergeonvalue.
¨ Thatsaid,Iwillbeatpeacewithmyself,ifattheendofmyinvestinglife,IlookbackatthereturnsthatIhavemadeandconcludethatIcouldhavedoneaswellorbetter,investinginindexfunds.Ienjoyinvesting.
Aswath Damodaran
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