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Norbert Schlenker, president of Libra Investment Management, had the following things to say in response to Kevin Cork's March 24th column at The Fund Library entitled The Tragic Perils of Passive Investing.
Tragic indeed. Tragic that innocent investors may be misled.
Cork’s thesis is that passive investing is inferior and that active management wins out. In particular, Cork sells actively managed mutual funds and his implication is that investors who buy those actively managed funds will outperform passive investors.
Critical thinkers should reread Cork’s arguments, most of which explain how bad passive investments are, and ask whether he makes a case that active management is any better. Cork can badmouth the competition but can Cork beat the competition? Let’s see.
First a note on methodology. Cork’s performance numbers appear to be mostly from periods ending February 2004. Let us use those numbers too. Every piece of data hereafter is from globefund.com, because their fund filters are available to anyone and are easily verified. We exclude segregated and pooled funds for simplicity.
Cork claims that the “average” actively managed pure Canadian equity fund outperformed the S&P/TSX60 over 1, 3, 5, and 10 year periods. (He has mixed apples and oranges, because the S&P/TSX60 is a large cap index and many pure Canadian equity funds have a small cap component if not outright bias.) But we’re not interested in what the “average” is. We’re interested in whether the average fund that Cork would recommend would beat one of his passive whipping boys, say TD Canadian Index. Given what he wrote, it seems safe to assume that he wouldn’t recommend any index funds, nor any no-load funds, nor anything that is small-cap, nor any fund targeted at a particular industrial sector or area of the country. Here is what globefund tells us:
There may still be a case to be made for active management outperforming index funds. The figures above show that paying Kevin Cork to identify those outperformers is a very long shot.
Cork also claims that iUnits have underperformed 7 of the 10 largest funds over the last three years. (Cork introduces a subtle error here. His implication is that large active funds outperform. It could be equally true that outperforming funds become large. Leave that for the moment.) Let’s use globefund again. 6 of the largest 10 are no-load funds, unlikely to be recommended by Cork because he wouldn’t get paid. Of the four remaining, one is a small cap fund, one invests exclusively in Quebec, and one is an “advisor class” fund where advisors charge fees on top of the MER, thus reducing published returns. Only one actively managed fund remains - GGOF Canadian Large Cap Value. Mr. Cork should tell his readers whether he loaded up his clients’ portfolios in March 2001 with it. Chances are he didn’t, because GGOF Canadian Large Cap Value wasn’t a big fund three years ago. It had only about $10MM in it and its current size is due to investors chasing recent good performance.
Finally, let’s leave the statistics behind for a moment. Cork claims that money gets pulled out of index funds when markets are soft and that money pours back in when markets are strong. That happens to be true for index funds. It also happens to be true for actively managed funds. Active management cannot save investors from this phenomenon. Disciplined investing can and does. But the discipline is in investors, not in active managers. Indeed, the evidence is that active managers are just as prone to herding behaviour as Joe and Jane Average. The index/active decision is irrelevant to this argument.
By Norbert Schlenker
Libra Investment Management
Reprinted with permission
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