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Finweek English Edition - - FEEDBACK - Steven Nathan

ing Govern­ment’s call for more pas­sive in­vest­ing. In my opin­ion, rather than of­fer­ing an “in­ter­est­ing coun­ter­ar­gu­ment”, the San­lam ar­ti­cle conjectures a mar­ket sce­nario that is mis­lead­ing and lacks fac­tual ba­sis.

In­dex­ing has dom­i­nated US in­vest­ment f lows for the last 10 years and is now a siz­able por­tion of their in­vested as­sets. There is no ev­i­dence that this tremen­dous shift has given rise to any of the con­cerns raised by San­lam, i.e. it has not un­der­mined price dis­cov­ery, re­duced mar­ket liq­uid­ity or im­peded cap­i­tal rais­ing. There are, and al­ways will be, suff icient spec­u­la­tors hop­ing to profit from any mis­pric­ing.

This should not be the ob­jec­tive of re­tire­ment savers, how­ever. Their ob­jec­tive must be to pur­sue their sav­ings goal at the low­est pos­si­ble risk. This means avoid­ing the risk of se­lect­ing an un­der­per­form­ing fund man­ager and los­ing an ex­ces­sive share of their re­turn to fees.

The mer­its of pas­sive over ac­tive in­vest­ing – as recog­nised by the National Trea­sury – are sim­ple and un­am­bigu­ous. The bot­tom line: in­vest­ing is a zero sum game. The to­tal ex­cess (above aver­age) mar­ket re­turn (‘alpha’) avail­able to all in­vestors is ex­actly zero. That holds true for ev­ery as­set class in ev­ery mar­ket. It does not mat­ter how ef­fi­cient those mar­kets are, or how small, or how con­cen- trated – the ag­gre­gate alpha avail­able to all in­vestors is al­ways zero. On aver­age, in­vestors earn just the mar­ket re­turn – be­fore fees. The less that in­vestors pay away in fees, the higher their net re­turn; on aver­age, there­fore, low(er) cost pas­sive in­vest­ing trumps high(er) cost ac­tive in­vest­ing. Some ac­tive man­agers do out­per­form, but re­sults prove that less than 20% of funds do so con­sis­tently and that there is no re­li­able way to pick those funds ahead of time.

The lo­cal in­vest­ment in­dus­try – in­clud­ing San­lam – is well aware of the arith­meti­cal and em­pir­i­cal ev­i­dence un­der­pin­ning pas­sive in­vest­ing. But the ‘ac­tive ver­sus pas­sive’ de­bate is a use­ful red her­ring that def lects from the many of the other harm­ful in­dus­try prac­tices crit­i­cised by National Trea­sury. Th­ese in­clude high ac­tive man­age­ment fees, in­vest­ment choice, ex­ces­sive com­plex­ity, poor dis­clo­sure, in­vest­ment ad­vice, mar­ket­ing tim­ing, switch­ing and other goalde­feat­ing habits.

Th­ese prac­tices do not im­prove the mar­ket re­turn; rather, they im­prove the in­dus­try’s re­turn at the ex­pense of the in­vestor’s re­turn. That is the real is­sue at hand: re­form­ing the re­tire­ment fund in­dus­try so that it serves the needs of in­vestors rather than ser­vice providers.

Chief Ex­ec­u­tive, 10X In­vest­ments

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