Robin Powell: Hello there. The active fund management industry is one of the biggest and most lucrative industries the world. According to Boston Consulting Group, it made profits in 2014 of $102 billion.
And yet only a tiny fraction of actively managed funds succeed in outperforming their benchmarks with any degree of consistency.
So why should that be? The investment author and consultant Charley Ellis believes there’s a direct link between the sheer number of active managers and their poor performance. When Ellis left Harvard Business School in the early 1960s, he was one of only two students to enter the investment management industry.
Charley Ellis: The two of us went to Wall Street. The next year there were 3 or 4. By the time a decade had gone by there were 50 or 100 coming in every single year. A flood of extraordinarily ambitious, talented, well-educated, knowledgeable people coming into investment management. As a group, those individuals, now a couple of hundred thousand of them, all over the world, all competing for trying to figure out what the price of every single security ought to be, have done a very good job in figuring out what the prices really ought to be. And the chance of doing better than all the others has gotten less, and less, and less. But the fee has stayed high so that incremental fee is hard pressed to earn its way to earn with the incremental return.
RP: When Charley Ellis started work, there were fund managers who really DID add value. That was because they had access to information that others didn’t. But things are very different now.
CE: The problem for most people I think is that they just don’t recognise not paying attention to how very many people there are who use the same kind of computers, have access to the same kind of staff, have Mike Bloomberg's wonderful system for gathering data and information anywhere you want it, use the same security analysis and research, get the same information from all the companies. So they are par-equal… and a whole bunch of different really important factors that 50 years ago really differentiated winners from the others. But now there is no differentiation because everybody has it.
RP: Charley Ellis believes that, slowly but surely, both institutional and retail investors are realising that active fund management is no longer worth the expense. He also suspects that, privately at least, active managers themselves are starting to acknowledge just how difficult a job they have.
CE: It’s very hard to recognise it what you’re doing, what you’re working at very very hard, and you know you’re talented, really talented, and deeply committed to it. And you get paid very well for doing it. And people look at you with great admiration and respect for your facility in the field. It’s really hard to say: “What we’re doing just doesn’t work.”
RP: Thank you to Charley Ellis for that insight and to you for watching. Until next time, goodbye.
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