Media Needs Active?
Making a living in the financial news industry is hard! Publishing even an online only publication requires revenue and the only firms with pockets deep enough to pay the needed fare for the money media tend to be those firms that provide some of the worst products and advice. The only firms rolling in dough are those that sell a lot of products at high prices (big banks and brokers, loaded funds, etc.). Their high revenue is exactly why they bad firm with which to invest, because the more they charge the less you make.
Over the past 20 years, there has been a steady flow on investment assets from expensive loaded (high commissioned), high-fee, actively managed products and into no-load, low-fee, passive funds (like those from Vanguard and DFA). Between 2007 and 2013, over half a trillion dollars moved from active funds, while almost $800 billion poured into passive funds.* Figures like these send chills down the spine of Wall Street, and they are struggling to stem this fearsome tide.
This rush to passive investing leads me back to the money media. In an interview, several years ago, Knight Kiplinger, Editor-in-Chief of Kiplinger magazine admitted that they needed to write about subjects that weren’t necessarily best for investors to keep readers reading and advertiser buying. In other words; passive, low-cost, massively diversified, regularly rebalanced may be the best strategy for most investors, but it’s exceedingly boring and doesn’t pay the bills.
I know from my three decades in radio that it’s tough to make a living. Prior to 1993, I was one of only a handful of financial talk radio hosts receiving a salary for my work. Then my network and many radio stations discovered that financial services companies would pay to host a program. I was replaced by a paid program and moved to Florida to independently syndicate my show. The only way it made economic sense was thanks to Disney providing facilities and staff and listeners subscriptions to my newsletter.
Today, I don’t believe that there is a single financial talk show hosted by a fully paid host. Bob Brinker is probably the closest, but I believe that most of his compensation comes from newsletter sales. Even our show, Talking Real Money, would not be on the air if we didn’t buy commercials to help sponsor the program. Most of what you hear, much of what you see, and some of what you read is directly reliant on some form of possibly coercive or self-serving financial firm funding.
I recently read a piece that seems to exemplify these pressures to appease sponsors. A small trade journal, Investment News, published a piece entitled Case for active management gets stronger every day as stocks power ahead. It presented arguments from some investing “experts” for the value of actively managed mutual funds.
The article starts by quoting Tim Holsworth, president of AHP Financial Services, a Raymond James brokerage office in Bay City, MI, “We know that active management only beats the market if you bring in the down years, but we're finding that more clients are better suited for active management because of the risk-tolerance issues…”
I guess making stuff up is an effective strategy when the “journalist” to whom you are speaking doesn’t fact check. For a 2008 white paper, Vanguard studied the performance of actively managed mutual funds in every bear market since 1973 and found that “…a majority of active managers outperformed the market in just 3 of 6 U.S. bear markets and in 2 of 5 European bear markets.” So much for active management beating the market in down years.
Overall, the rare times when active (predictive) investing outperforms passive (buying the market) investing have been shown to be primarily attributable to luck. In two separate studies, University of Chicago professor and Nobel laureate, Eugene Fama, in partnership with Dartmouth’s Kenneth French found that over a 20 year period, less than 1% of active fund managers beat their benchmarks after adjusting for the effects of luck. A similar study by the Swiss Finance Institute pegged the 20-year luck-adjusted positive performers at 0.6% of active managers.
If the numbers don’t dissuade you from believing in active investment management, maybe logic will work. Do you believe that anyone has the power to predict the future? If you don’t; case closed. Active management requires predicting the future accurately and consistently.
So, why do so many perceived “experts” persist in disseminating obviously flawed information? Just follow the money. One of the two experts quoted in the Investment News article was Dan Jacoby, chief investment officer at Stratos Wealth Partners. He stated “In an essentially straight up market, cash will be a drag on performance, if you're holding 5% or 10%, but in periods of increased volatility or even a sideways market, good managers will be able to take advantage with cash.”
Stratos Wealth Partners is a hybrid commissioned brokerage firm with LPL and fee-based investment advisor. To justify their commissions and high fees they need their clients to believe that there are experts with almost magical market-beating power. Without the historically spurious arguments in favor of active management, they have little or no chance of selling generally naive investors on the value of 5+% loads and 1+% fund expenses or 2.5% to 3% per year in advisory fees (according to the firm’s ADV Part 2 brochure, their highest annual fee is 3% of assets) plus 1+ % fund expenses.
There is no bear market protection of which I am aware that can save a portfolio from the ravages of fees this high. Even if one concedes the possibility that active management might work in a few cases, I have not been able to find even ONE active fund that has consistently (10+ years) beaten ANY benchmark by 3% to 4% PER YEAR.
The days of high fees and active investment management are drawing to a close, and we are watching an industry that has successfully bled investors dry for decades desperately try to maintain their outrageous sustenance in any way possible. The money media needs to accept this fact and seek out new sources of revenue or slowly fade away, too.
*Investment Company Institute 2014 Fact Book