This week in the arrogant rejection of beta...
“The most important of these rules is the first one: the eternal law of reversion to the mean (RTM) in the financial markets.”
– John C. Bogle (Founder of Vanguard), The Clash of the Cultures: Investment vs. Speculation
Since we in the Sloan IM community spend so much time trying to pick securities better than other market participants can, it is important for us to occasionally reflect on the eternal task ahead. For those of us just starting out in public markets, Bogle's words (and life's work) outlines the challenges facing stockpickers today, while for those more experienced in investing, it serves as a strong reminder.
So for this week's issue, we have decided to focus more on the 'active vs. passive' debate, giving our readers a brief overview of both sides of the debate.
Highlights:
- The Age-Old Debate: Active vs Passive Investing (Fin24): A concise summary of what this debate is actually all about.
- The Rise of Smart Beta (The Economist): Smart beta is the next stage in evolution of passive investing, and is essentially quantitative factor-driven investing.
- Why Do We Invest in Value Again? (Bill Miller): Tips from one of the most famous stockpickers of the past few decades on how active managers can stay relevant.
Announcements and Events:
- Bloomberg Lounge now open! For those who do not know, Sloan has a newly renovated study space/Bloomberg lounge at E51-355. There are many Bloomberg machines ready for use, as well as small cubicles for group study. Swing by to check it out!
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IM Club End-of-Semester Get Together - Save the Date! (Friday December 8, 2017) 5-8pm. More details to follow.
- Warren Buffett Trek (Friday December 1, 2017): spots are full but bribery still an option to get in...
- Fixed Income Management with Robert Hernandez & Heather Young (Monday December 4, 2017): Spots still open, so RSVP via the link below.
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Bank Balance Sheet Optimization in a Modern Regulatory Environment (December 6, 2017): Matt Zames (who recently resigned as COO of JPMorgan) will visit campus again and will be giving a lunch talk/Q&A with two colleagues from JPMorgan on 11:30am - 1:00pm at E62-276.
Srini Ramaswamy, Managing Director and Head of Portfolio Research & Analytics, Treasury & Chief Investment Office, JPMorgan
Mariano Zimmler, Managing Director, Treasury & Chief Investment Office, JPMorgan
Matthew Zames, Former COO of JPMorgan and current Executive-in-Residence at MIT Sloan
Latest Job Postings:
- Surveyor Capital (part of Citadel) - Summer Associate. Deadline December 7, 2017 (see job postings and two Surveyor-specific attachments).
- Lighthaven Capital - Investment Intern. Deadline December 10, 2017.
- Brook Venture Partners – Spring 2018 Intern
- The Vanguard Group - MBA Development Program - General Management (internship/full-time)
See attached document for more job postings/further details.
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The Age-Old Debate: Active vs Passive Investing (Fin24)
This article gives a concise summary of the debate that has raged on for the past few decades in the investments industry. As the article states, 75%-85% of all active managers in the US underperform their benchmark after fees. For this reason, more and more money is flowing from active funds to passive funds. However, active managers still play a role in the market, in terms of the ability (or rather probability) to generate excess returns, being able to customize portfolios, active risk management, and allowing investors to express their own views and beliefs in their investment decisions.
https://www.fin24.com/Opinion/the-age-old-debate-active-vs-passive-investing-20171103
For more on this topic, you can check out the following debate on Bloomberg:
https://www.bloomberg.com/view/articles/2017-10-11/passive-versus-active-investing-a-debate
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The Rise of Smart Beta
(The Economist)
While the article is a little dated, it does talk about the rise of smart beta - quantitative investment strategies that seek to generate excess returns through factor investing. Of course, the hedge fund industry has been doing this for years, but now smart beta promises (note the word 'promises') to deliver average consumers similar strategies for passive-like returns.
A two-part study by academics at the Cass Business School found that alternative indices beat a market cap-weighted index over the long run, and had a better risk-adjusted return. The study also found that a system that randomly chose constituent weights for stocks, like chimpanzees throwing darts at share-price listings, beat the market. As Jason Hsu of Research Affiliates, a firm that has pioneered fundamental indexing, says, these findings suggest big flaws in the cap-weighted approach.
https://www.economist.com/news/finance-and-economics/21580518-terrible-name-interesting-trend-rise-smart-beta
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Why Do We Invest in Value Again? (Bill Miller)
So just to make sure our debate is always two-sided, and that we're not all doom and gloom for this week's issue of the IM Club Newsletter, we pulled some notes from legendary value investor Bill Miller, whose Legg Mason Opportunity Trust fund famously beat the S&P 500 for 15 straight years (13.9% vs 7.8% percent including dividends, according to Morningstar).
As the Chairman and CIO of Miller Value Partners, Miller talks about the six things all active managers must do to stay relevant:
1) Compelling long-term record
2) Repeatable competitive advantage
3) High active share
4) Reasonable fees
5) Low turnover
6) Wide opportunity set
https://millervalue.com/a-checklist-for-evaluating-active-management/
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