A Perspective from the Other Side

For stock investing, we adhere to a “passive” strategy, which is based on the strong and extensive academic evidence which shows that “active” money managers do not outperform their respective benchmarks over a long period of time.

In a recent Wall Street Journal article,* the Journal said “while the Standard & Poor’s 500 index was down about 38% in 2008, the vast majority of actively managed stock funds lagged behind that mark.”

One of the top active money managers in the business, Bob Rodriguez, of the FPA Capital mutual fund and past Morningstar Fund Manager of the Year, said, “Let’s be frank about last year’s performance. In a word, we stunk. We managers did not deliver the goods and we must explain why…If active managers maintain this course, I fear the long-term outlook for their funds, as well as their employment, will be at high risk.”

We agree, which is one of the fundamental philosophies of our investment strategy. We do not think that over a long period of time, investors can consistently identify, in advance, managers who will outperform the market.

Rodriguez was further quoted: “If portfolio managers and analysts cannot recognize the greatest credit blowoff in the last 80 years, when will they?…If active managers continue to adhere to their old practices, we should see a contraction in the active mutual-fund management universe in the next five to 10 years.”

Besides questioning the benefits of active management, Rodriguez is also providing another example of the problem with active management, which is that you need a fund manager. Rodriguez is taking a one year sabbatical from his fund “to recharge his batteries” beginning on January 1, 2010. While he may very well deserve the time off, his investors hired him based on his past record and now he will not be steering the ship. Fund managers and their staff of analysts are continually changing jobs. So why do investors pay for active management?

To learn more about the advantages of our strategy, please contact us.

*Wall Street Journal, June 5, 2009, Fund Track

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