Jun 18, 2020
Welcome to another episode of the Rational Reminder Podcast! Today’s main topic is how to pick an actively managed fund to invest in despite funds of this type producing lower returns than passive ones! Before getting into that, we hear a few updates on Ben’s research into dollar-cost averaging versus lump-sum investing, discuss the factors that influence choice making found in an amazing new book by Sheena Iyengar, and touch on an OSC report on QuadrigaCX being a big Ponzi scheme! We get into our main topic next, introduced by the point that while Peter Lynch managed the Magellan Fund so well, none of its investors made any money out of it. We talk about the decrease in popularity of actively managed funds and Ben attempts to find out if it would be possible to sketch out a framework for picking one despite this. He does this by firstly defining active and passive investing and then tracing the evolution of the definition of Alpha (excess risk-adjusted returns) found in different key papers, where at each new contribution to the definition, the window for actually achieving Alpha gets smaller. Finally, we end with a framework but you’ll find out how it falls short of being able to narrow the definition of a sensible actively managed fund to invest in down beyond a certain point. From there, we get into some amazing OAS clawback retirement hacks that could earn you a lot of extra income and wrap up with a glance at the bizarre upsurge in Robinhood investors in now-bankrupt Hertz since the pandemic!
Key Points From This Episode:
- Updates about Ben’s work, fans of RRP, and brilliant upcoming guests! [0:00:40.1]
- Discussing The Art of Choosing and its meditations on factors that impact choice. [0:05:11.3]
- Findings of an OSC report about QuadrigaCX being a Ponzi scheme. [0:11:00.6]
- An article on Peter Lynch and why Active Fund Management doesn’t work. [0:14:53.4]
- A framework for picking an active fund; defining active/passive investing and Alpha. [0:20:40.9]
- An evolving definition of Alpha showing active fund management doesn’t often produce it. [0:24:11.3]
- Findings of a 2017 Vanguard paper that help identify Alpha in actively managed funds. [0:36:20.3]
- When an active fund is less bad: it is low fee, low turnover, and invested in small-cap value stocks. [0:43:43.3]
- Adding a criterion to active funds to invest in: those that aren’t that big. [0:44:46.3]
- The last piece to consider when finding an active fund: active share concerning your belief in the manager. [0:46:29.3]
- How Ben’s point about active share ties back to investors not doing well under Peter Lynch despite him being a great active fund manager. [0:48:57.3]
- This week’s planning topic: OAS secrets for the high net worth. [0:52:11.3]
- Bad advice of the week: the Robinhood investors buying bankrupt Hertz shares. [0:58:08.3]