Jerram Robinson

This article breezily makes several sweeping statements and attempts to present them as facts whilst providing no evidence to back the statements up. For example, I would like to see the data that supports the argument that Active Managers will outperform the market in a volatile environment. There is no reason to believe this would be true. Most of them can't even beat the market in a bull cycle, but for some mysterious reason we're led to believe that in periods of emotional panic selling and panic buying, that their stock picking ability somehow improves? Active Managers would have you believe that huge swathes of the market are now indexed, but the Index sector is still dwarfed by the Global Bond sector, and Indexing statistics can also include institutional and indexing strategies by large institutions, rather than pure Index/ETF funds. Vanguard and BlackRock have both shown that the vast majority of ETF trading takes place on the secondary market (i.e. ETF unit holders trading with each other), so it is still Active Managers who are responsible for price discovery. In a relatively recent paper, Vanguard have also shown than Index trading only accounts for around 5% of total trades in the market, while active mandates are executing the rest. If Active Managers really were skilled, then they wouldn't be losing so many of their assets to Index Funds in the first place. Palia and Sokolinski also argue in their paper that Index funds have reduced the cost of short-selling, further driving bad Active Managers out of the market, and in theory making the markets more efficient. All of this is of course devastating for Active Managers, which is why we're constantly subjected to meaningless sound bytes about Indexing being a cheap lunch and other scare tactics - it's their big bonuses, commissions and plush mansions on the line here, make no mistake about it. I personally do not object to paying higher fees for Active Management, providing they give you value and performance in return. But how many of them really do? Not many. I would encourage anyone to seek out the academic literature on Indexing, and draw their own conclusions. You will find that many of the fears about an Indexing bubble are overblown, and that the people pushing these arguments often have an ulterior motive for doing so. If I can borrow a phrase from this article, a paradigm shift is underway and the "cheap lunch" of expensive commissions that so many poor Active Managers have enjoyed is coming home to roost.