Click to listen to the latest episode of The Richards Report featuring Robin Powell.
My first podcast for 2018 focuses on the rising popularity of passive investments such as ETFs, which are rapidly increasing in popularity. This podcast is a big milestone for me with my first international guest, UK-based investing journalist Robin Powell. I’ve been following his work for quite a while and was very excited to get him on the show. Unfortunately, the quality of the audio on my end was a bit off so apologies in advance for this.
Robin and I discuss active versus passive management. Active investors try to beat the market by picking stocks and attempting to time the market. As Robin points out, the evidence suggests that it’s extremely difficult to do this consistently.
In contrast, passive investors don’t try to stock-pick – they take a share of the whole market with an index that simply tracks the market. Yes, they won’t outperform, but they won’t underperform either. They’ll simply give you consistent average returns.
ACTIVE VERSUS PASSIVE – WHAT DOES BUFFETT THINK?
Aside from the approach to investing, the key difference between active and passive management relates to fees. Robin points out that fees for an active manager are typically 10 times as expensive. That’s why, after costs, the evidence suggests passive investors almost always beat active funds when it comes to overall performance.
Warren Buffett, the greatest stock-picker of all time, recently won a famous bet that pitted a low-cost index fund against a basket of actively managed hedge funds over 10 years. Buffett ended up winning the bet so handsomely that the fund manager conceded defeat with six months still remaining.
Robin and I also speak about closet trackers – these are active fund managers without conviction who simply buy stocks to track the index, but charge large active fees to do so. Robin thinks that they’re “probably the worst example of all in a dysfunctional industry”.
We talk about SPIVA (Stand & Poors Indices Versus Active scorecard). This reports on the performance of active fund managers around the world and it is a remarkably similar picture across the globe. The SPIVA report finds that most active fund managers underperform their index and very few can consistently outperform (Robin suggests this figure is close to 1% of active fund managers).
THE BIGGEST THREAT TO THE INVESTOR
Robin has interviewed academics such as Nobel Prize winners William Sharpe (1990) and Eugene Fama (2013). Of all his subjects, Robin nominates Vanguard founder Jack Bogle as the person who has impressed him the most. If you don’t know much about Jack Bogle I recommend you check out some of his interviews on youtube here.
There is a quote in Robin’s documentary that I liked: “The biggest threat to the investor is you.” Robin outlines why this is the case, ultimately placing the blame on costs and overconfidence.
We finish by considering a question many active fund managers pose about passive investments – is there too much money leaving the active side for the passive side? Index funds and ETFs are a big threat to traditional funds so it’s quite common to hear the active side pushing these stories. However, as a proportion of total assets, passive funds are nowhere near the amount of actively managed funds, with about 10% of Australian funds in indexing (and about 30% in the United States).
As with every guest I ask Robin for any book recommendations. He suggested Jack Bogle’s book, The Little Book of Common Sense Investing, and Daniel Goldie’s The Investment Answer.
My favourite quote from the documentary comes from Warren Buffett, who says: “It is not necessary to do extraordinary things to get extraordinary results.”
NO FEES FOR THREE MONTHS
You can read about Six Park’s investment philosophy including the benefits of diversification, our selected ETFs and why it’s important to keep fees low. (Our annual fees are just $50 on a $10,000 investment.)
As a special offer to all new clients who sign up and fund their accounts by the end of January, Six Park is offering three months without fees.