You know those days when a long list of to-do’s instantly gives way to the necessity to respond to something that strikes you so viscerally you just have to drop everything and address it? Today is just such a day for me.
I received an email this morning with a link to this article titled, “Brilliant Morgan Stanley Strategist Retires and Reminds Everyone He Only Has A Job Because Investors Are Dumb.”
The article describes how Gerard Minack, in his final perspective piece as a departing strategist for Morgan Stanley, painstakingly set forth evidence of average active manager underperformance compared to indexes and index funds.
The article has Minack further asserting that while most actively managed funds fail to beat their own benchmarks, investors profoundly compound their underperformance by arriving too late to the winning-manager party. “The biggest problem appears to be that – despite all the disclaimers – retail flows assume that past performance is a good guide to future outcomes. Consequently money tends to flow to investments that have done well, rather than investments that will do well.”
True enough. Investors do seem to habitually undermine their own ability to achieve positive outcomes through emotional behavior that frequently results in buying high and selling low. But, Minack’s comment about investing in funds “that will do well” strongly begs the question: does Minack profess to have this sort of prescience or knowledge? And, if so, why would he share it with anyone?
While I am all too pleased to see what looks to be an admission of the failure of active management from a high-level brokerage industry player, Minack levies the blame (and the insults) squarely on his former firm’s (and other firms’) customers who are so stupid they are doomed to forever purchase the wrong products at the wrong times—perpetual victims of their own flawed decision making. “The net result is that the actual returns to investors fall well short not just of benchmark returns, but the returns generated by professional investors.”
Conveniently absent from the dialogue was any self-serving of humble pie or a recognition of his own role in a broken process that causes investors to fail in capturing the returns of the market that were theirs for the taking if they had simply bought, held and rebalanced a low-cost, passively managed portfolio (and lived their lives).
As a Strategist at Morgan Stanley, Minack was charged with “working across equity and fixed income markets” to seek “significant market trends, themes, and investment strategies that lead to superior returns,” according to the firm’s website. He created the very products he claims people are stupid for purchasing. Where is his accountability about his role in a flawed process? And for Morgan Stanley, it appears to be a very flawed process as only 50% of their fund managers have outperformed their Morningstar-assigned benchmark in 1-year periods, and substantially worse than that in longer periods. And that is for the funds that survived the period. In the last 15 years, Morgan Stanley has either merged or liquidated another 38 funds that are not accounted for in the benchmark comparison (morningstar).
Despite his observations of the failure of active management, Minack doesn’t seem to have forfeited his own speculation about future market movement — the hallmark of active management. “The outlook, in my view, is for low returns ahead,” Minack is credited to conclude. Statements like this make it difficult to shake off a suspicion that Minack’s return (in 3 months) as a consultant will focus on the allure of a “better mouse trap” for capturing above-market returns. I do hope I am incorrect in that suspicion. And if so, I will gladly serve myself a big piece of humble pie.