Our investment philosophy is built on a very simple, but heavily debated, premise—that the world’s financial markets are largely “efficient”. In investing terms, an efficient market is one in which prices are fair—they reflect all publicly available information. In such a market, it is exceedingly difficult for any investor to find securities the market has mispriced, let alone profit from trading in them. With trading costs and taxes providing an additional headwind to taxable investors, market-beating performance becomes even more elusive. Prudent investors, therefore, adopt a passive or index-based approach.
In spite of the overwhelming academic evidence supporting an index approach, most money is still invested with active managers who are paid to outperform the market. One such fund is the Norwegian Government Pension Fund, one of the world’s largest professionally managed portfolios. With over $430 billion in assets, the fund employs a staff of 249 to research and hire the best money managers. Norway’s Ministry of Finance says the Fund’s mission is simple, “to be the best-managed fund in the world”. Given its ample resources, long time horizon and its unusual level of sophistication, it is hard to think of a fund more likely to succeed.
Norway recently engaged an international team of experts to evaluate whether or not they were accomplishing their mission. The result was a 220-page report produced by three highly-regarded academics – Andrew Ang (Columbia Business School), William N. Goetzmann (Yale School of Management) and Stephen M. Schaefer (London Business School). The report’s conclusion? “The three professors found that for all their stock picking and do-gooding, the fund’s managers could just as well have thrown darts at a board….the fund’s performance was essentially indistinguishable from that of a passively managed index fund.”[1]
Let’s review the immense factors working in the Norwegian fund’s favor. The Fund is run by a team of 249 highly-skilled investment professionals who work day and night to select the world’s best money managers. The Fund then benefits from huge economies of scale that allow it to negotiate ultra-low management fees and trading costs (they pay their managers .07% on average vs. the average mutual fund fee that’s well in excess of 1.0%!). Finally, the Fund pays no taxes. Given all of these advantages, if the Norwegian Government Pension Fund can’t beat the market, what chance do the rest of us have?
1 “Passive Aggressive.” The Economist. February 4, 2010.