Why do people use asset managers? Newbie question
My question is basically why do people use asset managers considering that they underperform?
I remember from my finance class that a lot of studies were done on performance of mutual funds and etc. and the conclusion was that a person is better of with index fund. That is the conclusion of both efficient market and behavioural finance schools reach.
From Mallaby "More Money Than God": "Study after study has found that active mutual-fund managers, as a group, do not beat the market. They are charging ninety basis points and delivering nothing. Their fee per unit of alpha turns out to be infinite."
Well, a lot of folks don't have the confidence to manage their own money and some people are pretty sure they can beat the markets if they go through a smart hedge fund manager who takes out 5x leverage. A lot of the time, you have to be a contrarian to beat the markets, and that can produce a lot of agita. Best to let another smart person do it for you and avoid the stress of buying when CNBC is claiming it's the end of the world.
I do think that even for financial professionals, it can be advantageous to hire a manager who's familiar with the local markets when you are looking to diversify internationally. Same for some sector funds. It is also a lot more convenient to buy an ETF or mutual fund that holds local stock B than to try to buy it on the Paris exchange.
But yes, there's a lot more intrinsic value to be created in other financial products like insurance than there is in financial management. People are willing to tolerate 70-80% payout ratios when they realize an inflation-adjusted annuity can pay them a fairly safe 6% while stocks are risky and yielding only 3-4%.
Mutual funds are now, and always have been, a fucking joke.
BINGO.
Because they have someone to sue if things go south, and they don't want to be bothered to do it themselves
You're right 98% of the time. But If I'm going to be dumb enough to invest in China at the moment, I'd much rather hand my money to someone who speaks fluent Mandarin, has a US Securities license, and has a reputation for honesty, rather than buy some index fund which invests in any company with its books in any sort of shape. Especially if I can pay less than 100 basis points in management fees.
Mutual funds are expensive and generally do underperform. But I think there are identifiable exceptions to the rule.
^ That makes sense. Some PM got grandma +/-15% ROI seven years in a row, so I don't have any hate for them. There's probably a bunch of people who could have done that trading in one good day, but I'm not one of them.
herd/lemming instinct
people don't mind being losers so long as they are not far from the average
Ok so given that asset managers generally underperform why do people on this board regard Pimco, Blackrock and etc as prestigious / good for business school admissions? Why would one choose to start his career in asset management? What are the exit ops?
there's alot of reasons for this. among them, is as an entry level person at an AM firm you'll still learn alot about investing. also, there are funds/pms that have very good performance, the problem that is explained very well in greenblatt's book is that on aggregate firms that have tons of $ (i.e. fidelity/blackrock) simply can't outperform (before fees) because they can't concentrate their portfolios enough to generate significant alpha. Also if you think about it, AM firms make up a very large chunk of the end capital in the market, so net of fees they almost have to underperform the market. Lastly, on the public side of investing, you can pretty easily measure individualized performance (at least by looking at attributions etc) which is great if you are good.
Exit Opps would primarily be to other asset managers/hedge funds.
^
give me 1000000 coin flippers and i'll show you 100 genius coin flippers
heads all the time! amazing!
Because regular people don't know that active investing doesn't beat passive investing.
You have to use your judgement. Paying a mutual fund to actively invest in large cap U.S. stocks is probably a pretty bad idea. In the case of bonds, there really is no such thing as "passive" investing. Take a look at any of the global bond indices, every one of them will be most heavily weighted on the most highly indebted governments.
So when funds are such a bad way to invest, why are there so many sovergein wealth funds (in Norway, Saudi Arabia, China,...)? These countries could also buy ETFs or just shares of every company in an index.
Right, it does make a difference to invest active. And don't tell me about these studies comparing performance of funds. Of course all small I-asked-all-grandmas-to-invest funds are performing not as good as the market. But that doesn't hold you off of identifying a fund that fits your investing goals (be it bonds, sri or whatever)
Please tell me how you would passively invest in fixed income. Are you going to have significant weight in Italy and all the heavily indebted European countries? kthxbai
Actively managed fund for bonds absolutely makes sense. The focus of all those EMH studies were equity markets.
Just as many US equity managers benchmark against the S&P 500, many US fixed income managers seek to beat the Barclays US Aggregate Index. And of course there are ETFs that track the Barclays Aggregate Index (AGG).
Et provident ipsa illum vitae totam ducimus et. Laborum dolor ut repellat iste. Itaque est quis officia occaecati qui. Animi distinctio similique facilis et nesciunt quis.
Voluptatem doloribus repellat eos voluptas ipsam tempore. Ut illo in iure cupiditate voluptatum officiis. Voluptatem dolorem magni laborum expedita consequuntur. Quia ipsam et molestias necessitatibus in molestias aut. Deleniti quae quibusdam omnis aspernatur.
Laudantium aperiam aut iure qui. Nobis incidunt corrupti nihil quam reprehenderit. Reprehenderit illo recusandae totam labore dolores. Est adipisci laudantium optio nemo voluptatem. Et commodi consectetur numquam amet enim non. Porro corrupti laudantium ex odio non placeat. Facilis molestiae inventore iste velit maxime enim ut est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...