Value Library
The following is an excerpt from the ABC Perspective -
January 2010 - Pg. 16
Looking Beyond the Valley
In January 2007, the Yale School of Management published How Active is your Fund Manager? The study found that the more different a fund is from its benchmark, the more likely it was to outperform. The most active stock pickers created value for investors, while closet indexers tended to destroy value.
Economically, these results suggest that the most active diversified stock pickers and concentrated stock pickers have enough skill to generate alphas that remain positive even after fees and transaction costs. |
- Jonathan Ratner
Financial Post
January 3, 2010 |
I have never been a fan of portfolio indexing. Truth be told, constructing a securities portfolio which will closely mirror a certain benchmark has always struck me as being a cop-out, an easy way out. Furthermore, indexing, to provide investment returns so as to closely track a benchmark, in my opinion, implies that the portfolio manager doesn’t have the ability or confidence to use his experience, good judgment and analytical skills to outperform a certain investment yardstick.
Interestingly, we are in an industry that evolves around performance. Successful investing thrives on free-thinking decisions, economic and business challenges and the element of a portfolio manager’s self-satisfaction. The goal of most investment professionals is investment excellence. Furthermore, the task to carry out the significant duties and responsibilities, while stressful, can be incredibly exciting, invigorating and both materially and psychologically rewarding. In consequence, portfolio indexing, whereby a majority of portfolio managers will try to mirror a widely accepted index such as the TSX 300, the Dow Jones 30 Industrials or the S&P 500, in my opinion, takes away the incentive to be different from a pack of highly competitive investment managers.
Clearly, if an analyst/portfolio manager is quite able and has the ability to ferret out undervalued stocks from a heap of diverse equities, the manager should be encouraged to utilize these skills. Indexing, in my opinion, discourages an innate desire by an individualist manager to outperform by taking the risk to be different from the crowd. This point is notable since the beauty of the investment industry is that it largely encourages innovation, intellectual skill and proactivity. Consequently, as indicated by this Yale study, skillful stock pickers should be encouraged. Admittedly, while there will be periods of significant relative underperformance against an index benchmark, we believe that, in the long run, the increased risk of being different is well worth the meaningful investment rewards.
Irwin A. Michael, CFA
|
