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In this now-classic speech by mutual fund industry leader John Bogle, he persuasively argues for ‘passive management with low cost funds’ as the safest way to assure a market return, and to eliminate the risk of materially under-performing the market.
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Over the years, Brandes Institute research has shown active managers, even the best-performing ones, suffered periods of weak returns relative to benchmarks and their peers. But the underperformance, up to three years, had relatively little impact on the best-performing funds’ ability to deliver success over 15 years. It may prove short-sighted to fire good managers when they inevitably underperform. Instead, consider other vital factors when evaluating managers-such as investment philosophy, process, organization culture and alignment with client interest-to help discern weak short-term returns from other, more serious problems.
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Is Skill Dead? – GMO White Paper

Neil Constable, Matt Kadnar (GMO)

Depending on which database you are looking at, between 80% and 90% of active U.S. equity managers will have underperformed their benchmark in 2014, making it one of the worst years for active management in the recent past. However, just because active management in general has been through a difficult period, it does not necessarily follow that what is past is prologue. As investors find themselves asking questions about their active managers given their recent poor performance, the authors from GMO have some insight as to what may be driving some of the headlines lamenting that performance.
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In this paper, the author addresses a few of the principal issues associated with selection of money managers including why it is so difficult to identify best-in-class managers in time to profit by investing with them, why past performance can be completely meaningless, what the characteristics of best-in-class managers are, and what approaches make most sense in optimizing the mix of managers in a portfolio.
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Active investing has been subjected to increasing abuse, particularly by those whose opinions are driven by the persistent accumulation of hard data and logical arguments. As we all know, active investing is on the defensive-even, some skeptics claim, “on the ropes”-having suffered a series of setbacks and increasingly virulent attacks. Especially scornful personal abuse has been aimed at active investing’s few remaining advocates. The time has come to mount a defense, not by the usual citing of occasional exceptions or by dismissing the challengers with colorful pejoratives but, rather, by looking at the broader picture and pointing out the many indirect benefits that skeptics-with their narrow focus on just “beating the market” for clients-apparently continue to miss.
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Evidence increasingly shows that a “crime” of extensive underperformance has been committed in mutual funds, pension funds, and endowments. In a pattern reminiscent of Agatha Christie’s famous novel Murder on the Orient Express, an investigation leads to a surprising, if inevitable, conclusion: The usual suspects – investment managers, fund executives, investment consultant, and investment committees – are all guilty.
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Performance investing has enjoyed a remarkably long life cycle, but the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing. Investors – both institutions and individuals – are increasingly shifting toward indexing. As acceptance of indexing grows, clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.
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Actively Passive

Gregory Friedman (Greycourt)

The evidence in support of utilizing passive investing as the core of long-only equity exposure is compelling, especially for taxable investors. While superior long-only active managers certainly do exist, identifying them requires enormous amounts of time, effort and expertise. More importantly, even if an investor is successful at identifying top performing active long only managers, the magnitude of excess return generated by “winning” managers can be quite modest. Investors should look carefully at each active manager and be cognizant of the issues that exist such as potentially higher taxes and higher fees relative to their index equivalent. We do believe that compelling active equity managers do exist and can be found but they are extremely rare and identifying them is extremely hard.
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The New Era of Manager Due Diligence

Deborah Kidd (Boyd Watterson Asset Management)

The movement of alternative assets into the mainstream presents challenges for both traditional and alternative asset consultants and investors. Alternative investments and strategies have substantially altered the landscape of manager due diligence. Many of the traditional principles guiding due diligence should be revised to reflect this new era.
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