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Extreme Hubris

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Blue Whale's fund manager Steven Yiu may come to regret his decision to call publicly for 'most active managers to quit'

It is certainly not a fund manager's job to make friends but why Blue Whale's Steven Yiu went out of his way in the FT yesterday to do precisely the opposite surprised me. Perhaps the FT should be commended for making Yiu look foolish - the readers' comments are most revealing - even if the article paints the entire active management industry in an unfavourable light.

The points I would like to make are:

  1. There is zero evidence that Yiu himself is skilful. Piling into tech when tech is in a bull market should not be considered skilful. Fund outperformance can only be deemed to have been more likely due to skill than luck after many years, not just five.

  2. Calling for 'most active managers to quit' is like suggesting that lower league football clubs should shut up shop. By definition, not all active funds can be above average in the same way that not everyone can be an above average driver. Outperforming active funds do so at the expense of underperforming funds - there is no magic pool of alpha that everyone can drink from. If most active funds quit, per Yiu's suggestion, then half of those remaining would soon join the ranks of the underperformers. Would he then be asking them to quit? And so forth. Until what?

  3. According to the article, Yiu says that only “high conviction” active managers who back a small portfolio of carefully chosen stocks can justify their existence in the face of fierce competition from passive alternatives. But there are many ways to skin a cat. What about high conviction asset allocation? There are just as many inefficiencies in relation to systematic returns for high conviction managers to take advantage of as there are with idiosyncratic returns.

  4. There are many reasons retail investors go active rather than passive. There may be an intellectual challenge in picking winners. One may want to feel part of a landmark national project like the channel tunnel, unconcerned whether one will beat the market. One may want to back a family friend or an acquaintance. Fund investors do not necessarily expect to outperform. They should be given more credit.

  5. It is true that there is more inertia in the industry than there should be with respect to fund attrition. Unlike a broken TV that can get repaired, the underperformance of an active fund often represents a permanent loss of capital. Thus the decision to sell and realise a loss is a harder one and thus one that may be delayed. However, there is a process in place to deal with underperforming funds - it is called commercial common sense. And it is alive and well. It seems that by calling for most active managers to quit, Yiu is invoking something beyond market forces. And yet it is market forces that were required to produce the outperformance he claims to have been responsible for.

An active fund manager's product is not the fund he manages and its constituents - they belong to the investors - but his buy and sell decisions. Yiu may come to regret his decision to agree to the FT interview.

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

© Chimp Investor Ltd

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