MICHEL PIREU: Maths and the facts debunk the myth of parasitic index investors
Active investors as a group also replicate the market, at a price that exceeds the likely reward
Chris Veegh of 10X Investments took exception to last Tuesday’s Bottom Line column, which accused passive investors of piggy-backing on active investors.
He wasn’t the only one.
But Veegh wrote a piece that ought to be read by all sides of the debate. "If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If neither are on your side, pound the table." It’s a dictum that the active lobby has taken to heart, says Veegh, before asking: "Why invest passively?" His answer: this inconvenient question highlights the flaws in the fund manager model. It has to do with the zero-sum nature of active investing, the less-than-even chance of delivering a market-beating return after fees. It also speaks to our inability to reliably predict future winners and the corrosive impact of the high fees charged by fund managers. This is the stuff of the "active versus passive" debate. But how much debate can there be if both the arithmetic (the "law") and empirical evidence (the "facts") overwhelmingly support indexing? Hence the appeal to emotions rather than logic. Invariably, this appeal subjects index investors to fear and shame...
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