For those who are movie buffs, you will recognize the title of this blog from “Field of Dreams”. The phrase refers to 1919 Chicago White Sox, who unfortunately became known as the Chicago Black Sox. Many players on the Chicago team were accused of taking money from bookmakers to throw the World Series and were banned from baseball.
In the movie, when a little boy was talking with a Chicago player that he looked up to, “Shoeless” Joe Jackson, he said, “Say it ain’t so, Joe”. The news about someone whom the child had put on a pedestal was breaking the boy’s faith in baseball and he was hoping Joe would say the reports were not true.
How does this relate to a blog from an investment guy?
In my last blog, “Is Trying to Pick Active Managers a Loser’s Game?”, I mentioned this line and, as I was expecting, it has come in for some criticism.
It is hard for many to believe what the numbers show: that index funds outperform most actively managed strategies.
For many years, active management was the only game on Wall Street and managers with hot hands were, and still are, put on pedestals (see the link to Warren Buffett’s advice below). Many of us grew up in an investment world that was dominated by reports of star active portfolio managers. For me, moving beyond this has been particularly hard.
I spent the majority of my career successfully promoting and selling active management. I believed in it and was good at it, rising to be a Managing Director and receiving awards from the Chairman of my firm for record sales of active strategies. I have even written pieces on subjects such as how to find talented managers using tools such as Active Share (more on this in the future).
Sometimes I feel like the little guy in “Field of Dreams”. I fundamentally believe that people who work harder should have an advantage and, even though I am now am convinced, a part of me still wants the answer to be different when research compares active managers to index funds.
As with many things, however, it is not all about working harder. You need to also work smarter, not let emotion get the better of you, and stay focused on solid evidence about what consistently works over long-term periods (please notice the use of the words long-term). In the world of investing, this has made me a believer in so-called evidence-based investing which, based on long-term evidence, is biased toward index strategies.
I could write much more about this but, versus presenting only my ideas, I encourage you to take a look at the evidence yourself.
At the end of this post, I have listed a few links to recent articles and research on this subject. You can find other pieces on our Fiduciary Wealth Partners Pinterest website, which we are experimenting with as a place to post articles. If you have others articles or research papers on this point, please let us know and, as always, we welcome data that gives the other side of an argument.
Charts often tell a story best, so I include the following table from a 12/31/14 comprehensive study done by S&P Dow Jones Indices. It illustrates the percentage of U.S. equity funds that underperformed their appropriate benchmark index (a link to the full report is at the end of this post).
In summary, the S&P Dow Jones Indices research reports that:
Say it ain’t so, Joe. Say it ain’t so.
Preston D. McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts and follow him on LinkedIn and Twitter please visit the following:
Financial Times – Active Fund Management Is Not Fit For The Purpose
(this link might require a subscription to the FT)
Warren Buffett To His Heirs: Put My Estate In Index Funds
Warren Buffett’s Advice to LeBron James: Index Funds
(yes, Buffett, who is known to be focused on long-term evidence, is an index fan)