actively managed vs. passively-managed investing: the debate
TRANSCRIPT
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ACTIVELY-MANAGED VS. PASSIVELY-MANAGED INVESTING
THE DEBATE
GROUND RULES Questions
• Attendees are in listen-only mode • This webinar is being recorded for future on-demand playback • Your participation represents acknowledgement that we are recording • Tweet questions & comments to: #WelchExpert
Windows Mac Tablet
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Kash J. Pashootan CIM Senior Vice President & Portfolio Manager First Avenue Advisory of Raymond James Ltd [email protected]
Micheal Burch CPA, CA, CFP Managing Partner Welch LLP [email protected] @WelchLLP
PRESENTERS
Daniel Solin NY Times Bestselling Author [email protected] www.danielsolin.com
Cameron Passmore CIM, FMA, FCSI Partner & Portfolio Manager PWL Capital [email protected] @CameronPassmore
Steve Barban CIM, CFP Principal/Senior Financial Advisor Gentry Capital/ Manulife Securities Inc. [email protected]
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POLL
How do you currently invest your money?
ACTIVELY-MANAGED INVESTING
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• Provides downside protection given the ability to move into cash
• Reduces volatility and overexposure to certain securities or sectors
• Can avoid risky portfolio weightings during frothy markets
• Focuses on quality
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• Provides investor with an opportunity to outperform the benchmark
• Allows the investor to capitalize on market inefficiencies created by irrational decisions made by others - new study of behavioural finance (Much the same way that Einstein’s “relativity” replaced Newton’s “physical laws”)
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The Proof
The Gentry Capital Un-Common Sense© theory has had an average annual return of 27.14% from January 1, 2003 to December 31, 2014 (24.00% compounded)
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WHAT ABOUT PASSIVELY-MANAGED INVESTING?
• Increases overall risk due to overweighting in securities that
have the highest market-caps and highest share prices
• Forces the investor to “reverse dollar cost average” – must
buy securities when their cost is going up and sell when they
are dropping (counter-intuitive)
• The “tracking error” makes it virtually impossible to mimic an
index
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WHAT ABOUT PASSIVELY-MANAGED INVESTING?
• Liquidity issues when wanting to unwind a position (i.e.
US high yield market currently)
• Will never (ever) meet the benchmark – and will
underperform the index 100% of the time
• Based on the Efficient Markets Hypothesis (EMH) from
the early 1960’s which has since been disproven – and
which Eugene Fama himself now says is not accurate
+32.6%
-10.7%
-60%
-40%
-20%
0%
20%
40%
60%
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
S&P 500 TSX
Geographic allocation decisions have boosted returns
ASSET ALLOCATION
11 Source: Thomson One Charting S&P 500 vs. S&P/TSX Composite Information in this report was obtained from sources believed to be reliable but we are unable to guarantee its completeness and accuracy.
67% CDN 33% USA
50% CDN 50% USA
33% CDN 67% USA
• June 10, 2013 Globe & Mail: “We continue to shift assets out of Canada and into the US” • Aug 23, 2013 Twitter: “Is the sell-off in the TSX a buying opportunity? No, remain underweight”
Kash J. Pashootan, CIM SVP & Portfolio Manager
+3.7%
+6.5%
-1.6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
Equities Portfolio w. Cash Benchmark
Tactical allocation has improved risk adjusted returns
ASSET ALLOCATION
12 Source: Bloomberg Portfolio Analytics <PRTU> Information in this report was obtained from sources believed to be reliable but we are unable to guarantee its completeness and accuracy.
Jan 1, 2015 2% Cash
May 12, 2015 15% Cash
Sept 6, 2015 2% Cash
Jan 7, 2015 25% Cash
Portfolio Sharpe Ratio: 2.01 Equities Sharpe Ratio: 1.11 Benchmark Sharpe Ratio: -0.71
Kash J. Pashootan, CIM SVP & Portfolio Manager
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
Gold Bullion
Gold: purchased Jan, 2007 & sold Jan, 2013
BEING ACTIVE TO PROTECT GAINS
13 Source: Thomson One Analytics: Gold avg weekly spot price Information in this report was obtained from sources believed to be reliable but we are unable to guarantee its completeness and accuracy.
• Dec 7, 2012 Twitter: “Is $1,700 gold overvalued” • May 16, 2013 Twitter: “Gold poised to lose 20%” • Nov 26, 2013 Globe & Mail: “We do not believe gold will rise”
Kash J. Pashootan, CIM SVP & Portfolio Manager
Well prepared for oil downturn
14 Source: Thomson One Analytics: WTI Avg weekly price Information in this report was obtained from sources believed to be reliable but we are unable to guarantee its completeness and accuracy.
• Feb 1, 2013 National Post: Sell Canadian Oil Sands • July 10, 2013 Twitter: “$106/bbl oil is not sustainable” • Oct 10, 2014 Bloomberg: “2014 rise in oil is unwarranted” • Oct 24, 2014 BNN: “Energy, not up on demand”
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
BEING ACTIVE TO PROTECT GAINS
First Avenue: 12% S&P/TSX Index: 35%
First Avenue: 6% S&P/TSX Index: 32%
Commodity weighting
Kash J. Pashootan, CIM SVP & Portfolio Manager
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PASSIVELY-MANAGED INVESTING
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What Are We Talking About?
Dan Solin
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“Active Management”
Claims the ability to beat a designated benchmark (like the the S&P/TSX Composite) by stock picking, market timing and fund manager selection.
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“Passive Management” (aka “Evidence –Based Management”)
Captures the returns of the global markets. Doesn’t engage in stock picking, market timing or fund manager selection. Focuses on low costs, asset allocation and broad diversification.
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What Does The Evidence Show?
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“The average net alphas, depending on the set of passive benchmarks, are between −3% and −2%. Although there is a wide distribution of alphas across advisors, there is scant evidence of any advisor enhancing performance enough to offset the large expenses. An investor who saves for retirement effectively gives up a quarter of his future savings (in present value terms) by lagging the benchmarks by 3%." (my emphasis) [The data include transaction-level records on over ten thousand financial advisors and these advisors’ one million Canadian clients, along with demographic information on both investors and advisors.] Source: http://tinyurl.com/j92ggk3
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Domestic Active Managers Underperform
For the five year period ending December 31, 2014:
“The results are unequivocal across all domestic equity categories. The data shows the losing pattern repeating across all categories, as the majority of active managers underperformed their benchmarks.”
Source: SPIVA-Canada Scorecard-Year-End 2014
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Foreign Funds Do Even Worse
• 13.16% of active International Equity Funds beat their
benchmarks;
• 2.83% of active Global Equity Funds and 2.9% of active
U.S. Equity Funds outpaced the S&P EPAC LargeMidCap, S&P Developed Large MidCap, and S&P 500,
respectively.
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This is Not a Typo
No Canadian Dividend and Income Equity Funds outperformed their index.
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Luck or Skill?
• Findings of study by Fama/French
• About 97 percent of the funds they studied performed
worse than efficiently managed passive funds.
• The top 3 percent of active fund managers demonstrated only enough skill to cover their costs.
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Odds Against Picking “Winners” Prospectively
For the five year period ending September, 2015, “no large-cap or mid-cap funds managed to remain in the top quartile at the end of the
five-year measurement period.”
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Warren Buffett (1)
"Most institutional and individual investors will find the best way to own common stock is through
an index fund that charges minimal fees. Those following this path are sure to beat the net results
[after fees and expenses] delivered by the great majority of investment professionals.”
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Warren Buffett (2)
“The active investors will have their returns diminished by a far greater percentage than will
their inactive brethren. That means that the passive group – the "know-nothings" – must win.”
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Peter Lynch
“All the time and effort that people devote to picking the right fund, the hot hand, the great
manager, have in most cases led to no advantage.”
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Merton Miller, Nobel Prize Winner
“Most people might just as well buy a share of the whole market, which pools all the information,
than delude themselves into thinking they know something the market doesn’t.”
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Kenneth French
“The market is smarter than we are and no matter how smart we get, the market will always be
smarter than we are.”
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Paul Samuelson, Nobel Prize Winner
"Even fans of actively managed funds often concede that most other investors would be
better off in index funds. But buoyed by abundant self-confidence, these folks aren't about to give up
on actively managed funds themselves. A tad delusional? I think so.”
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Michael Lewis
“Nobody knows which company will prove a good long-term investment.”2
"Wall Street, with its army of brokers, analysts, and advisers funneling
trillions of dollars into mutual funds, hedge funds, and private equity
funds, is an elaborate fraud.”
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Daniel Kahneman, Nobel Prize Winner
“I don’t try to be clever at all. The idea that I could see what no one else can is an illusion.”
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William Bernstein, Ph.D, M.D.
• "The deeper one delves, the worse things look for actively managed funds.”
• “Mutual fund manager performance does not persist and the return of stock picking is zero.”
• "99% of fund managers demonstrate no evidence of skill whatsoever.”
• "When it comes to fund managers and market strategists, this year's hero usually turns into next year's zero.”
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Charles Ellis, Ph.D
"The long-term data repeatedly document that investors would benefit by switching from active
performance investing to low-cost indexing.”
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The Ambachtsheer Letter
"Rather than making money, 240 pension funds lost about 0.5% per year on average, over the last
five years through their active management activities.”
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Larry Swedroe
“[Active management] is “the triumph of hype, hope and marketing over wisdom and experience.”
The Case For Evidence-Based Investing
Cameron Passmore, CIM, FMA, FCSI Portfolio Manager
Why Has PWL Chosen An Evidence-Based Strategy
For Our Clients?
• Markets work.
• You do not need to predict the future.
• Factors explain returns.
• Diversification is your friend.
Evolution to Evidence-Based Decisions
There are almost 100 million trades per day worldwide, worth just under half a trillion dollars.
Who is on the other side of all these trades?
“The sensible solution would be for investors to put their money into low-cost index funds and just keep it there.”
– James Surowiecki, Author of “The Wisdom of Crowds”, in The New Yorker, January 16, 2012
The Wisdom of Crowds
– Warren Buffet, “Could Stocks Still Be Undervalued?”
article from Mark Seller, Feb 18th 2004.
“A prediction about the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting”
Academics have been studying sources of
stock returns, and publishing in peer reviewed journals, for decades.
Who should you listen to when
choosing an investment strategy?
• > 8,500 stocks • 45 countries • Many currencies
Diversification Is The Only Free Lunch
Canadian Large Cap
Canadian Small Cap
Canadian Value
US Large Cap
US Value
US Real Estate
International Large Cap
International Value
Canadian Fixed Income
2001 2003 2005 2007 2009 2011 2013 2015
HIGHER RETURN
LOWER RETURN
In CAD. Chart is for illustrative purposes only. Diversification neither ensures a profit nor guarantees against loss in a declining market. Canadian Large Cap is the S&P/TSX Composite Index. Canadian Small Cap is the MSCI Canada Small Cap Index (gross dividends). Canadian Value is the MSCI Canada IMI Value Index (gross dividends). US Large Cap is the S&P 500 Index. US Value is the Russell 3000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap is the MSCI EAFE Index (net dividends). International Value is the MSCI EAFE Value Index (net dividends). Canadian Fixed Income is the FTSE TMX Canada Universe Bond Index. S&P/TSX data provided by S&P/TSX. MSCI data © MSCI 2016, all rights reserved. S&P data provided by Standard & Poor’s Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. Dow Jones US Select data provided by Dow Jones Indexes. FTSE data published with the permission of FTSE. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.
• Massive diversification.
• Low Fees.
• Tax efficient.
• Easy rebalancing.
• Lifetime strategy.
• Better behavior from aligning with academia.
Other Benefits of Going Passive
– Warren Buffet, 2004 Berkshire Hathaway Annual Report.
“So many investors, brokers, and money managers hate to admit it, but the best place
for the average retail investor to put his or her money is in index funds”
“I can think of many cases in which I would recommend active money managers over index funds. For example, I might be giving the advice to someone I hate, or—and this happens a lot—someone I expect to hate later. I would also recommend active money managers if I were accepting bribes to do so, if I were an active money manager myself, or if it were April Fools’ Day. And let’s also consider the possibility that I might be drunk, stupid or forced to say things at gunpoint. I’ve also heard good things about a German emotion called schadenfreude, so that could be a factor too.” – Scott Adams, Creator of Dilbert, Wall Street Journal, April 16, 2013.
“Under what circumstances would you advise somebody to use active money managers as
opposed to index funds?”
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POLL
You’ve heard from both sides, how would you invest your money?
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Kash J. Pashootan CIM Senior Vice President & Portfolio Manager First Avenue Advisory of Raymond James Ltd [email protected]
Micheal Burch CPA, CA, CFP Managing Partner Welch LLP [email protected] @WelchLLP
QUESTIONS
Daniel Solin NY Times Bestselling Author [email protected] www.danielsolin.com
Cameron Passmore CIM, FMA, FCSI Partner & Portfolio Manager PWL Capital [email protected] @CameronPassmore
Steve Barban CIM, CFP Principal/Senior Financial Advisor Gentry Capital/ Manulife Securities Inc. [email protected]