Dec 31 2009
Happy New Year!
Happy New Year from the West Coast of the USA.
Welcome to 2010.
The Financial Analysts’ Journal carried an article in 1996 investigating findings by financial academia. As reported by Mark Hebner in his excellent book, “Index Funds: The 12-Step Program for Active Investors,” he writes, “…three top investment officers at Washington State Investment board analyzed some of the information… and one of the studies was performed by Ronald Kahn and Andrew Rudd.” Kahn & Rudd’s conclusions are as follows, again quoting Hebner.
- “No persistence of returns can be found among U. S. equity managers.”
- “Some persistence can be found among U. S. fixed-income managers, but not enough to justify the payment of active manager fees.”
If the conclusion is that “there is no persistence of returns found among U. S. equity managers,” what is Kahn doing authoring a book as listed below?
Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk. One can only conclude that it is difficult to understand the concept that markets are efficient. We operate as if the markets are inefficient and as individual investors, we have the capabilities to ferret out those inefficiencies, capitalize on them to our own financial advantage. Granted, there are a very few individuals who are able to do this consistently. We only hear about the”Tony Gwynn’s and Ted William’s” of the investing world.
Using the journals findings of 1996, the Washington State Investment Board concluded that the best investment style is passive and that even quasi-active or enhanced strategies that take active bets in addition to a passive style will not add value to a portfolio. The larger the portfolio, the more this seems to be true. CALPERs has taken a similar approach and 95% of their portfolio is index based.
It is difficult to find anyone who has read a fair amount of financial literature who will conclude other than large-cap asset classes are efficient. As we move toward smaller cap asset classes, there is general agreement the equities become more inefficient as less is known about the smaller companies. Also, fewer analysts follow small companies. This assumes stock analysts add value to understanding companies. Likewise, it is more difficult for the small investor to collect useful information on the smaller companies. For this reason, I tend to use ETFs to populate small and mid-cap asset classes. The same holds true for REITs, international or developed countries, commodities, and emerging markets.
Examples of portfolio planning, construction, managing, and monitoring can be found over on the Premium Content side of ITA Wealth Management.
Photograph: Maasdam cruise ship anchored off the Cayman Island
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