This week the Wall Street Journal noted that net flows into passively managed funds have surged in recent years, leaving active managers to pick up the crumbs. And earlier this year, none other than Warren Buffett, one of the most successful active investors of the past 50 years, in his annual letter to shareholders, warned of the high costs of active management and gave a qualified endorsement of indexing. Is the waning popularity of active management part of a permanent shift in the evolution of the asset management industry? Charles Ellis, CFA, in "The Rise and Fall of Performance Investing," takes the view that we are indeed seeing “a seismic change in the profession.”
Ellis says that the stock market has become increasingly efficient over the past 50 years due to the talent the industry has attracted, as well as significant advances in tools and training. Mispricings are now quickly arbitraged away, making sustained outperformance after fees rare, and for clients, “a game not worth playing.” Active managers, meanwhile, are being pinched by downward pressure on fees, leaving their businesses more vulnerable to the trend toward passive investing. Ellis thinks the industry should embrace the change, and instead of focusing on “price discovery,” or stock picking, emphasize “values discovery,” the process of structuring a suitable long-term investment strategy based on clients’ objectives with respect to income needs, time horizons, and risk tolerances. While you may not share Ellis' viewpoint that active management is in permanent decline, this thought-provoking piece is well worth reading.
Below are some other stories that caught my eye in recent weeks.
Strategic Thinking
- "Has Buffett Lost His Touch?" (Forbes)
- What makes Warren Buffett a great investor? (Farnam Street)
- Can biomimicry improve investment decisions? (CFA Institute Magazine, PDF)
Big Business
- "An Insider’s Account of the Yahoo-Alibaba Deal" (Harvard Business Review)
- "Smoke Signals: What the Reynolds-Lorillard Merger Means for the Tobacco Industry" (Knowledge@Wharton)
Valuation
- Robert Shiller on the mystery of lofty stock market valuations. (The New York Times)
- According to Anatole Kaletsky, exuberance is not always "irrational." (Reuters)
High Profiles
- George Soros' secrets to success. (The Irish Times)
- Meet Stewart Butterflied, founder of Flickr and Slack. (Wired)
- The power and influence of Morningstar. (Financial Times)
Risky Business
- "The Hedge Fund and the Despot" (BloombergBusinessweek)
- "Paper Boys: Inside the Dark and Extrememly Lucrative World of Consumer Debt Collection" (The New York Times Magazine)
Emerging Markets
- "Nigeria: Africa’s Testing Ground" (The Economist)
- "Seven Things to Consider about Emerging Markets" (Context)
Economics
- "The Man Who Really Built Bitcoin" (MIT Technology Review)
- "Where the Five-Day Workweek Came From" (The Atlantic)
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: ©iStockphoto.com/JLGutierrez