The following letters are in reference to our article, Active versus Passive Management in Bear Markets, which was published last week. Our response follows these two letters.
I found this article at once misleading and amusing and clearly not what it pretends to be in any way.
Allow me to elaborate; Mr. Huebscher’s statement in the body of his article, “we take no position in the active versus passive debate” is utterly ludicrous. His entire premise is one of attacking passive management in general and the Standard and Poor’s SPIVA Report specifically. He clearly contends that there is hope that active management is the answer, which simply serves to indict his alleged neutrality on the entire topic. Clearly he has an axe to grind and does so to no avail. In order to successfully refute an argument, he would, by necessity, have to pose an equally compelling argument supported both by evidence and methodology. In this context he offers neither.
In order for his thesis to be respected, it would be best to clearly state that he supports active management, doesn’t mind paying the extra fees along the way and can identify which managers will succeed in advance. Good luck on all fronts!
Further, he should break down the number of shareholders by fund as well as assets to truly deem who benefits and who is harmed by underperformance. For example, perhaps he could make a case for one of the largest and best known actively managed funds: the Fidelity Magellan Fund. This noteworthy stalwart of the “no-load” industry has woefully underperformed the S&P 500 for over a decade, yet it charges its shareholders 73 basis points for the privilege of the possibility of beating the market, which it consistently fails to accomplish. Or better yet, perhaps he could craft a similar defense for the esteemed member of the American Funds family known as The Washington Mutual fund, which is so admired by wirehouse brokers, charges an up front commission and holds nearly $40 billion in assets. The fund, by its prospectus, dines only on stocks in the S&P 500 that are dividend payers and yet somehow delivered less return than the S&P over the last ten years.
Is it truly possible the SPIVA report is somehow accurate or is harpooning two of the largest funds just anecdotally easy and also a matter of luck? I suggest Mr. Huebscher do a bit more research and he will quickly discover that the facts do indeed support both the SPIVA report as well as the aforementioned anecdotal evidence. Nobel laureates across the globe agree on this topic.
At the center of this debate is the question of whether or not markets are indeed efficient. Picking funds is little different than picking stocks when one gets down to the nuts and bolts of how both are accomplished. Funds are picked on the track records of their managers, superior performance and expected returns that are perceived as likely to recur. Unfortunately, the graveyard of failed expectations is filled with the likes of John Ballen, former manager of the high flying MFS Emerging Growth Fund, Gary Pilgrim of the PBHG Growth Fund, and more recently Bill Miller of the Legg Mason Value Trust, the gang at Dodge and Cox, and others.
If you please, I would also make one more request; Tell us all how to pick active managers, in advance, who outperform with consistency on an after-tax basis. That would indeed be greatly appreciated.
Pathways Financial Partners
PS--- I still admire and respect your newsletter as the best open forum of ideas for independent advisors!
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