reaction to guaranteed active management

The FT letters section is becoming something of a blog. Last week reader Jason MacQueen promoted “guaranteed active management”, a scheme to guarantee investors a return higher than that offered by managers of passive funds. Fund managers would assume all of the downside risk and reap any upside rewards.

MacQueen’s letter drew a lengthy response from reader Jon Hay, who wrote (in part):

It is nice for any one fund manager to be able to claim that it has outperformed a benchmark. But it is quite wrong and misleading to cultivate the idea that investors should generally expect their managers to outperform. That is self-evidently impossible. That the average active manager underperforms the benchmark after costs is necessarily always true. ….

[F]und performance … often — even if it may underperform a benchmark — delivers capital growth and income in absolute terms. That can only be the true goal of fund management.

Jon Hay, “Benchmark obsession is a distraction from fund management’s true goal“, letter to the editor, Financial Times, 9 January 2017 (gated paywall).

Mr Hay is Corporate finance editor of GlobalCapital, a magazine published by London-based Euromoney Institutional Investor. His letter attracted not letters, but short comments from ‘HoundDog’ and ‘EconLarry’. The second pseudonym belongs to the writer of this blog (Thought du Jour).


Mr Hay presumably thinks it is impossible for the average manager to out perform because they are the market. This is not true. In the US, active fund managers are 23% of the market and therefore there is no mathematical reason for the average manager to under perform (there are of course plenty of other reasons)


Mr Hay asserts that the purpose of active management is to provide investors with “Capital growth and income in absolute terms”. I disagree. Active management must perform better than the market to justify high fees. This is especially important when markets are falling. An active fund that falls 5% or less (after fees) when benchmark funds fall 10% is stellar performance. Unfortunately, such performance is seldom repeated. “Past performance is no guarantee of future results.” This is particularly true for actively traded funds, which charge high fees and produce widely varying results in addition to low returns, on average, compared to passive funds.

HoundDog’s point is well-taken. Mine is also critical of Mr Hay, but rather different.


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