Vanguard's Wallack: Impossible to find sector where active management wins

Jul 8, 2013 @ 12:00 am

Runtime: 4:13

In a debate with Gerstein Fisher's Gregg Fisher, the Vanguard principal argues that nonpassive management might add dispersion from a benchmark ó but not performance.

Video Transcript

On this week's WealthTrack, the Active versus Passive debate. Two season investment pros argue the case 4 and against in a surprising twist Vanguard principal Daniel Wallick present the active management case, while award-winning financial advisor Gregg Fisher defends with Passive approach. Their arguments are next on Consuelo Mack, WealthTrack. I began the interview with this question given the poor performance of most active stock managers: Why should we even bother investing with them? -Most of the assets are actually in active management. So there's a real sort of paradox between all of this money enacted even though it has historically under performed. And the reason I think is that people are interested in some slight amount of outperformance because if you can compound just the small beating of the market that compounding really ends up being big deal. So people are hoping that they are able to achieve that. -Tell me why you bother with active management? -Well, I think it's important to point Daniel just made that. People in general seemed to want to win. And there's something about human behavior that has them want to search for some potential outperformance. There is a strong case for investors building their portfolios using market-based or index funds. However, when you look at different asset classes, there are situations where the average outperformance for active management is better. When we look at the average across the whole universe, these numbers are true. But for example, when you look at a specific piece of the market like growth investments, what we find there is that actually-- active managers, on average, do seemed to do a little bit better. So we might wanna look at parts of the market, where we in fact should consider active management. -In your analysis at Vanguard, are there specific types of investing that tend to do better-- -Yup. -With active managers? -No. In fact, we-- our analysis would say, there's no real space where there's more efficiency or not. What we do see is there's wider dispersion in some areas. And some people equate dispersion with the probability about performance but there's a big difference. Dispersion just means the distance you'll be from the benchmark that could be positive or negative. It doesn't actually create any better probability of outperforming the index. So, no, we have not found any space where there's anything better than the index. -Why is it so few active managers, you know, outperform their indexes? -We would say mostly it's because of cost, all right? So-- -I would expect you to say that from Vanguard. -Well, so the active managers are typically measured against the benchmark. The benchmark has no cost associated with it. Any active manager has to turn on the lights and, you know, feed the people who work for them. So there's gonna be some cost associated with that and depending on how high those fees are, that's a higher hurdle over which that manager needs to achieve. And that's really why we would think that most active managers have a hard time beating the index. -Right. Would you agree with that that basically cost is the big-- [unk] I know you've had a lot of tension to taxes as well. -Sure. I do agree that cost is a major factor, but it's not the only one. I mean, it's very difficult to outperform the market. When you think about how much information is in the price of securities. The idea of finding mispriced securities and outperforming the market based on information that only one of us has versus the average of all of us, it's a very difficult thing. When we then add in-cost and as you mentioned as we've discussed taxes are critical factors as well. So when you look at first the challenge of outperforming the information that exists in the market, second, the cost, which are critical and then taxes. These three things are major handicaps, which is why active managers have a very difficult time.


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