A retired equity strategist has said that retail investors don't act in their best interest, insinuating that he thinks they're stupid. Is he right?
Gerard Minack was a celebrated investment strategist at Morgan Stanley in Australia until he retired recently at an apparently young age (as suggested by this photograph).
Photo from Inside Business, 2012
With this change in his life, he has expressed his attitude about retail investors — that they do poorly. Some have even interpreted his statements in a more unflattering light. That he thinks retail investors are stupid.
Active managers, on average, do not do as well as passively managed index funds. In other words, they simply do not beat their own benchmarks. Additionally, the longer they are followed, the more this is true.
Retail investors, in trying to beat the market, chose last year’s active manager’s winners. The fallacy here is that since no one can predict the market, last year’s winners are often next years’ failures. This means the average shareholder is investing his money poorly in a “hope over realism” process. An investor who has read the disclaimers for actively managed funds knows that “past performance is not an indicator of future results.”
This means that many investors buy high and sell low. Minack is assuming that the number is large. Further, he is saying that the problem is the investor himself. He does not take into account or acknowledge that he or his firm as well as virtually all of those that are comparable promote this kind of behavior (i.e. investing in actively managed funds). They sell them is to make money, even though their performance overall lags behind passively managed index funds that are less expensive.
Because of this, investors who buy actively managed funds are not able to capture market returns. This is because they are buying high cost managed funds instead of low cost passively managed index funds. Costs diminish any gain.
This is what investment consultants for retail investors, such as myself, teach: Use asset allocation for selection of passively managed low cost funds, hold them and periodically rebalance. This approach has been demonstrated over and over again to glean profits more of the time than buying actively managed funds.
The flaw in Minack’s thinking is that he or his firm is not responsible in any way. Minack shaped the Morgan Stanley products that he claims people were less than smart to purchase. In fact, over a five-year period nearly 70% of Morgan Stanley’s actively managed funds underperformed their benchmark. This does not take into account Morgan Stanley funds that were merged or liquidated, thereby making the actual numbers worse. This begs the question: Did Minack have retail investors’ best interest at heart?
It would seem to me that the answer is clear. Minack blames investors for their poor performance, but takes no responsibility himself nor does he suggest Morgan Stanley might be to blame.
There is a positive note to all of this however. Those with an investment portfolio between $100,000 and $1 million are freeing themselves from financial advisors and investment firm promotions to “go it alone,” according to the Spectrum Group. I wrote about this in a previous column entitled “Advisor? What Advisor?”
In a nutshell, “the percentage of self-directed investors among the mass affluent in this study increased from 39% to 44% from 2009 to 2013. Coincident with this, the percentage of advisor-dependent households dropped from 15% to 10%. Even the advisor-assisted group (some help) decreased from 20% to 17%.
So investors are getting smarter. Gerald Minack just doesn’t know it.