View more on these topics

Robin Powell: Denial is no way to handle ills of active management

Warren Buffett’s business partner Charlie Munger made an extraordinary observation the other day – and hardly anyone batted an eyelid. Munger, still razor-sharp at 95, was speaking on the subject of active money management.

“These index funds have come along and basically beaten everybody,” he said. “The amount by which they beat everybody is roughly the cost of running [an active management] operation. So, we’ve got a whole profession that is being paid for accomplishing practically nothing.”

I call it extraordinary observation but data has consistently shown for many years that Munger is right. Only a tiny number of active managers beat the market on a cost- and risk-adjusted basis.

Robin Powell: Five things advisers can learn from doctors about trust

What really is extraordinary for Munger is how the industry has chosen to respond to this existential crisis. Most active managers, he said, are “in a state of denial, doing what they always did year after year, and hoping the world will keep paying them for it. They have a horrible problem they can’t fix so they just treat it as non-existent”.

As Munger says, burying your head in the sand is “a very stupid way to handle a problem”. To quote economist JK Galbraith, “faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof”.

Why, then, do people continue to believe in ideas which the evidence shows are false or inaccurate?

In the case of active management, it’s mainly about financial incentives. There are large numbers of people who benefit financially from active investing. The financial media is largely paid for by active fund advertising.

But I read an article recently by self-help writer James Clear which really challenged my thinking. Truth and accuracy, Clear explains, are not the only things that matter to the human mind; we also have a deep desire to belong.

“We don’t always believe things because they are correct,” he says. “Sometimes we believe things because they make us look good to the people we care about.”

Cost of active investing a “tax” on the market

Yes, financial incentives play a part in the industry’s failure to face the facts about active management. But Clear has a point – it’s also about tribalism and the need to feel socially accepted.

Investment professionals want to be seen by their peers to be saying the right thing. But although denial may be a natural response, it’s not a professional one. It’s unacceptable for a fiduciary, who wants the best for their clients, to keep ignoring the evidence on active management.

Thankfully, there are some UK fund managers starting to break rank – Baillie Gifford, for example, with its refreshingly candid paper Riding the Gravy Train. But mostly they behave like ostriches. There’s too much to lose. And I don’t just mean their seven-figure salaries.

Robin Powell is a journalist who blogs as The Evidence-Based Investor and runs Regis Media. You can find him tweeting @RobinJPowell


Mixed Investment 0-35% Shares

Schroders increases stake in troubled Provident

Schroders has increased its stake in a troubled sub-prime lender Provident Financial. The asset manager has upped its holdings in the company from 12.4 per cent to 13.7 per cent, according to a stock market update earlier this week. Yesterday, a further update suggested that Schroders’ total holdings of ordinary shares in the company had […]


Aviva appoints new chief executive

Aviva has named its new full time chief executive six months after Mark Wilson announced he would be stepping down from the role. Maurice Tulloch, who has been with the firm since 1992 and currently overseas Aviva’s international insurance business, will step into Wilson’s shoes as chief executive of the parent company. Chairman Adrian Montague […]

darius mcdermott

Darius McDermott: Property investing – caveat emptor

Out of favour since the Brexit vote, but is it time to buy into bricks and mortar? Janus Henderson’s announcement that it is moving its open-ended UK Property fund from bid to offer pricing to a fixed price has brought property investments back into the spotlight after a period of quiet. Since the EU referendum […]

Global equities: time to de-risk?

While equity valuations have doubled since the financial crisis, Simon Edelsten explains that there are still pockets of value. But not where you might think Macro-economic uncertainty is causing turbulence in equity markets. Artemis Global Select Fund manager Simon Edelsten says his investment themes are taking him in a different direction to some of his peers – away […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm