Author Charles Ellis, CFA, contends that structural changes in the US market have eliminated the prospect of outperforming average market returns, after fees, through active management. The causes include the rise in institutional and high-speed machine trading and changes in regulation. Active management may still pay off in low-efficiency markets, such as high-yield bonds and emerging market debt. The book does not address findings that the most active stock pickers who take large but diversified positions unlike the index weightings beat their benchmarks.
Preferred stock index funds are a double-edged sword, says David Allison, CFA, CIPM. They are a simple, liquid, and low-cost way for investors to gain exposure to preferreds, but their simplicity makes them a blunt tool and harbors risks.
Investment professionals recognize that the markets are messy places, filled with less than rational participants. From their perspective, this can obviate any further discussion about the value of academic finance and its models. But this puts too high a threshold on the measure of academia.
By far the biggest hurdle to handicapping or investing is recognizing when basic conditions have changed, be they rule changes, unexpected weather, personal issues of the professionals, or any number of other fluctuations. From an investment viewpoint, I believe 2015 experienced such cumulative changes that made many of our old approaches less useful.
This week's round-up of interesting papers, articles, tweets, and blog posts covering economics, investor behavior, retirement, and more.
"We flood the system with data without very much explanation of what the data really means, and we do not focus on the clients," Charley Ellis recently told an audience of investment professionals. "We sell products. And we increase our fees, and our fees have increased significantly."
Fixed-income index funds typically closely follow the construction rules of the indices they seek to replicate; in particular, bonds that violate an index’s minimum maturity rule will often be removed from funds that track that index. Recent research suggests that following minimum maturity rules causes funds to underperform.
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