Aoifinn Devitt: Brought to you with the kind support of Federated Hermes Inc., a leading global investment manager. Guided by their conviction that responsible investing is the best way to create wealth over the long term, their investment solutions span equity, fixed income, alternative and private markets, multi-asset and liquidity strategies, and a range of separately managed accounts distributed through intermediaries worldwide. Our next guest believes that overconfidence and our love of a story has led us down the wrong path when it comes to choosing investment managers. Find out why next. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast. A podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Robin Powell, who’s a journalist, investor advocate, financial educator, and content consultant. He is head of client education at Rockwell, as well as editor of The Evidence-Based Investor and executive director of Regis Media and Ember. He is a frequent commentator on investment management and behavioral finance, often probing the purported value added by active managers. Advocating for better transparency and investor education. Welcome, Robin. Thanks for joining me today.
Robin Powell: Well, Aoifinn, thank you very much for having me.
Aoifinn Devitt: Well, we’ll start with where we always start, which is where did you grow up? What did you study? And how did you come to be so interested in the world of investing?
Robin Powell: I grew up in the Midlands, the English Midlands, but born in Staffordshire and went away to boarding school and then to Oxford where I studied history. And a lot of my contemporaries went into— well, we used to call it merchant banking. So they went off to make a a shedload of money and I went off to work in journalism, which is obviously not quite so well paid, but was something that I’d always wanted to do. And yeah, I worked in television for most of my mainstream journalism career, mainly for ITV, but also a little bit for the BBC and latterly for Sky News. And yeah, it was when I left Sky News and set up my production company, Ember Television, that we were asked by a wealth management firm to produce a documentary about investing and specifically passive investing. I’m actually not very comfortable anymore with that phrase passive investing, but that’s what we called it at the time. And I was absolutely fascinated that there is all this evidence out there that actually for the vast majority of investors, the best thing to do is just simply to buy the whole market through low-cost index funds, keep your costs as low as possible, and just sit there and ignore the noise and invest for the very long term. And yeah, I was so shocked, if you like, that the whole of the industry seems to kind of encourage people to do the very opposite, that I resolved at that point that I was going to be an investor advocate to try to help investors do the right thing.
Aoifinn Devitt: Well, we’re certainly going to dig into a little bit more of that in terms of the active-passive debate. A little bit later on. Can you just, before we go into some of the themes, what was the market backdrop like when you entered the industry? I mean, can you just paint a picture for us in terms of active managers, what was in favor, what were the hot tickets then?
Robin Powell: Right, okay. Well, I must say I am a latecomer to the investing industry. I mean, I’ve literally been in it for the last sort of 10 years, if you like. And I mean, I suppose 10 years ago, we were still recovering from the global financial crisis and financial services, the reputation of particularly big financial firms was at a pretty low ebb. Faith in capitalism, I suppose, and in the global financial markets to deliver good long-term reliable investment returns was at a low ebb as well. So in a sense, it was a good time for me to be getting involved because Certainly in America, index funds in particular, passive investing had been popular for quite a while since, I suppose, the turn of the century, but there had been an acceleration. And I think the financial crisis really focused people’s minds on how am I going to receive the best returns I possibly can. Here in the UK and of course in Ireland, it was a similar story in that We are far behind the United States in terms of our understanding of the kind of failure, the kind of industrial-scale failure of active management, if you like. But nevertheless, that was the start of a sort of growth curve, a slow growth curve for passive investing in Britain and Ireland.
Aoifinn Devitt: Well, I think we should just dig right in because we’ve got a lot of themes to cover. So there’s a recent article at the end of the year which suggested, let’s go to both the UK and the US in terms of active equity managers and whether they outperformed a passive alternative. It seems that only 34% of active equity funds beat the median passive in this year. That was according to AJ Bell. Yeah. And that this would have been UK funds. And then in the US, it seems like that number was only 22% of active North American funds beat the index. Is this a pattern that you are continuing to see?
Robin Powell: Absolutely. I mean, the first thing to say is obviously 12 months is no time period whatsoever to be making any decisions about your investment philosophy or to sort of form views about what works and what doesn’t work. The point is, Aoifinn, that that figure that you mentioned, a small proportion of active funds beating the index. I mean, let’s face it, you’d expect just simply by random chance that half of them would beat the index. So what we’re actually seeing is Fewer than half beat the index in any one given year. And of course, you and I and investors out there, we don’t invest for one year. We invest for 30, 40, 50 years. You know, our children will be investing for maybe longer than that, 60, 70 years. And all the evidence shows that over the very, very long term, only a very tiny fraction, somewhere around 1% of active managers actually do produce outperformance over the long term. And you might be thinking, well, that’s pretty simple then, Robin. I just pick the winners then. But the point is you’ve got to pick the winners in advance. We can all see who the winners have been in the past. We can all see who did well and who did badly last year. We have no idea who’s going to do well and badly this year. And as for the next 40 or 50 years, That’s anybody’s guess, to be honest.
Aoifinn Devitt: And how about if we look maybe across the different market caps, say large cap, small cap, mid cap? I can understand how it might be difficult to beat an index in a very efficient segment, say US large cap. Well, what would you say about emerging markets equities or maybe small cap UK?
Robin Powell: Well, you touched on that, that phrase market efficiency, and that really, really is a very important point. Markets are fundamentally efficient. We have willing buyers and willing sellers. Every single trade, there has to be someone at each end of the trade, if you like, and they both think they’re getting a good deal. Otherwise, why would they trade? Markets are efficient in that respect was actually a PhD thesis written by a French mathematician called Louis Bachelier in the year 1900, which showed that actually because of this equilibrium, if you like, in the markets, then in his own words, the short-term markets of the movement are anybody’s guess. He actually used the phrase, “No more predictable than the steps of a drunkard.” It’s a random walk. We have no idea where markets are heading and which stocks are going to do particularly well. Now, we can argue even until the cows come home about just how efficient markets are. The point is that they are sufficiently efficient to make it very, very, very difficult for anyone, even the smartest of smart fund managers, to beat the market over the long run. We hear this argument all the time that there are some markets that are so inefficient that actually they do offer opportunities for active managers. To an extent, it’s true, but you have to be there at the very beginning. In other words, when a developing market is really just at its kind of very embryonic stage. India is a classic example. A few years ago, people would tell me, ah, this stuff you’re writing, it might apply to Britain, it might apply to America, but it doesn’t apply to India. Yes, there was a stage where India was quite an under-researched— I think it was the phrase you used— an under-researched market, and it was possible for active managers to beat the index. But actually, if you look at the data now from the likes of Morningstar and S&P Dow Jones Indices, it’s actually just as hard, if not harder, to beat the Indian stock market than it is to beat the US stock market. This applies not just across countries, but across asset classes, small-cap stocks, value stocks, it also applies across fixed income as well. It is very hard for an active manager to outperform in the long run.
Aoifinn Devitt: Well, why do we still have an active manager industry then? What is it about active management that continues to attract investor capital? What do you think it is?
Robin Powell: This is the €6 million question really, isn’t it, Aoifinn? Because I wish I knew. And I think it’s largely down to human nature. We think we’re better than we actually are. We think we’re better than average drivers, but in aggregate, we can’t all be better than average. Some of us, I’m actually happy to hold my hand up here, are actually below average drivers, but you wouldn’t believe the bias that investors have. They think that they can beat the market. They think they can pick up the Irish Times or the Mail on Sunday here in the UK, follow the stock tips and beat the market just on the strength of a newspaper article. So overconfidence is a massive thing. The other thing is the active fund industry is a very, very powerful industry. It has a huge marketing and advertising budget. It spends massive amounts On newspaper advertising, big billboards in stations, on the side of taxis, asset managers, for example, will sponsor big sporting events, rugby matches, cricket matches. I’m sure it’s the same in Ireland as well. They’re everywhere. And the message is that by picking the right people, you can actually beat the market. But all the evidence says that that is not true. And then the final thing I would say, so I’ve mentioned human nature, I’ve mentioned the power of the industry, and the third thing, sadly, I would say that contributes to it is financial advisors. Financial advisors are very conservative with a small c. They have often built up large businesses or successful businesses, should we say, on the back of commissions, commissions paid by fund managers to sell their products. Now, those commissions were banned in the UK a few years ago under what’s called the Retail Distribution Review. As you know, in Ireland, you don’t yet have RDR, and to be honest, RDR in Ireland cannot come soon enough because that will level the playing field. And then the blarney, if some advisors come out with about active management being better than index funds, they won’t be incentivized to do that because they won’t be paid anymore for recommending active funds. They’re the main reasons why so many people still use active funds.
Aoifinn Devitt: And there’s also the allure of the story, isn’t there too? I mean, each stock has a story. The reason there’s an edge or an information edge usually has a story behind it. And we have so much to get through, but I’d love to know what you think on meme stocks. I mean, isn’t that evidence of the same?
Robin Powell: You’re absolutely right. Since the caveman and woman, stories is how human beings have communicated and got information over, persuaded people. Stories are very, very powerful and we are very partial to a story. We are not so good at maths, a lot of us. I certainly, speaking for myself, I don’t know whether we just sort of switched off in the kind of probability classes in maths at school, but people just don’t seem to get a grasp on the probability of outperformance, either by picking stocks or by picking funds. On average, you are likely to fail. I mean, meme stocks are a classic example. Meme you stocks, know, stocks that people talk about on social media. Very often stocks are talked up for a reason. People want to build the price up, you know, short sellers and so on are kind of waiting to pounce. It is a very bad idea, frankly, not just buying meme stocks, but buying individual stocks at all. There’s research by a guy in the US called Hendrik Bessembinder, and I’d encourage your listeners to look for it. It basically shows that about 4% of stocks actually beat the market and actually produce strong returns, if you like, in the long run. By strong returns, I mean better than US Treasury bills, US government bonds, if you like. And how the heck are we supposed to work out what that 4% of stocks is? You’ve basically got a 1 in 25 chance of picking one of the very few winners who are really going to drive market returns going forward. I mean, your Facebooks, your Googles, your Netflixes, that sort of thing. It’s very, very hard to identify them.
Aoifinn Devitt: I think you’re right. If COVID has taught us anything, it’s that the average person’s understanding of statistics is definitely not what it should be. Staying on some of the other issues that I see kind of crossing an average investor’s desk right now, we spoke about meme stocks and how about the current wave of democratization of more complex products such as alternatives, which are now increasingly being sold in smaller chunks. What are your thoughts on that?
Robin Powell: Well, this is a worrying trend. And I think broadly what is happening here, and I’m happy to admit people might think this is a cynical view, I don’t. The industry realizes that the game is up with public markets. They realize that the evidence, the data is completely irrefutable. It is very, very hard to pick a winning active fund manager in advance. And the way they’ve got around it historically is they frankly have been opaque about two things. First of all, the performance they produce, and secondly, the fees and charges that you incur for using those funds. So it’s an industry that’s been lacking in transparency. Thankfully, Aoifinn, regulators the world over, including in Ireland, are now getting to grips with that. And the public markets and fund managers who invest in public markets, they are now bound by much higher standards as far as transparency is concerned. We do not have that same level of transparency in hedge funds, for example. We certainly don’t have them in the likes of private equity and venture capital. It is so easy for a private equity fund manager to make it look that they are producing strong returns when they’re not. If I again could refer your listeners to research, there’s a guy called Professor Ludovic Palipau at the University of Oxford who has written extensively on private equity returns. He’s got a a website and a book in fact called PE: Private Equity Laid Bare. And it really just explodes all the myths about private equity. For example, there’s this claim that private equity produces better returns than public equity. Actually, the data shows that is not the case. The claim again is that there is an illiquidity premium attached to private equity. And to an extent, that’s true that there is an illiquidity premium, but once costs have been factored in, fees and charges, the data from Professor Philippou and others clearly shows that on the whole, private equity managers do not deliver the kind of outperformance that some people like to claim they do.
Aoifinn Devitt: Well, we’ll certainly put links to all of these pieces of research in the show notes, and thanks for bringing them to our attention. And this ties a little bit to a question around financial literacy in general, because I know this is something you feel strongly about, and obviously it’s enhanced if the transparency is there. So in a way, they’re two sides of the same coin, that we need the industry to be more transparent to fully be educated about it. But what do you think can be done in terms of ensuring better investor knowledge and better financial literacy?
Robin Powell: Well, it’s a really difficult one, isn’t it? Because who does it? Who provides the financial literacy education, if you like, and how is it paid for? Unfortunately, what we have is a kind of reluctance generally on behalf of states, nations to pay for financial literacy. So we have a lack of financial education in schools. We learn about all sorts of things which aren’t going to be useful in later life, but children aren’t taught about the basics of how the stock markets work, how to save, how interest works, and so on. So that’s a real concern. And another worry for me is frankly, a lot of the people who are kind of purporting to offer financial literacy education actually have a vested interest in, in a sense, misleading investors, particularly about the best thing to do. So a classic example would be stock picking contests. They’re very popular here in the UK. And it’s a way for asset managers to maybe use it to offset tax, make it look as though they’re providing valuable financial education service by going into schools and holding these stock picking contests. But they’re absolutely nonsense because generally they’re over the course of a term or an academic year. As I started by saying at the beginning of this conversation, a year is no guide to future returns. You are effectively gambling if you are picking stocks over the course of a school term or a school year. We shouldn’t be encouraging our children to gamble on individual stocks at all. So yes, it’s really important that the financial literacy is done by people who are actually qualified to do it and incentivized to actually tell people the truth about what’s best for them.
Aoifinn Devitt: And I’d love to get now to another area that we’re seeing quite a lot of product proliferation in the area, and that would be ESG. And I want to maybe bring in, A, what’s driving— what do you think of the recent surge of investor demand, and does the product proliferation concern you? Yeah, we’ll start with that, and then I’ll go to my second question.
Robin Powell: Well, product proliferation always concerns me. It is a massive problem. We’ve got far too many investment products, far too many investment products. And yeah, there is academic evidence to show that the more choices you give to consumers— and this isn’t just in the investing sphere, it’s everywhere— the harder it is for them to make a decision. Having said that, I am a big believer in ESG. I think, well, I think we all have to be, and particularly those of us who’ve got children or grandchildren, because the world, as we know, is facing a massive climate crisis. We have got to do something about it. And ESG investing is one way to do it. Now, I think there is a danger in overestimating the power of ESG investing. Yes, you can make a difference, but frankly, you’re not going to make a huge dent in climate change, even— well, unless we all invest this way. And I suppose eventually we will all be investing this way because I think what we’ll see in the years ahead is a kind of convergence between sort of mainstream investing and ESG investing. Frankly, if companies aren’t interested in climate change and what to do about it, they don’t deserve their place in the FTSE 100 or the S&P 500 or whatever. All companies are going to have to get their act together on the E, environmental aspect of ESG. Frankly, you can probably do more good for the environment and for your community and the world around you and helping to ensure that people are paid a decent wage and are employed in safe, humane working conditions, if you like. You can probably have more influence as a consumer than as an investor. But having said that, ESG is important. And also, let’s be clear, there’s no guarantee that it’s actually going to deliver any better results than investing in the opposite, which are often called sin stocks, you know, your polluters, your tobacco manufacturers, and so on. But I just think it’s an important thing that all of us ought to be doing.
Aoifinn Devitt: And I wanted to reflect back on the point you made earlier about getting increasingly uncomfortable with the word passive. I’m wondering where that comes from. Is this something to do with the fact that so-called passive managers are now engaging on issues like ESG and they are active in that sense? Or where does that concern come from?
Robin Powell: That’s a very good point, Aoifinn. I think a lot of people think passive investors equals passive shareholders or passive share owners who aren’t interested at all in what company boards are doing on environmental and social and governance issues. And actually, if you look at the academic evidence, we’ve actually got an article by with Gary Swedroe on my own blog, The Evidence Based Investor, about why that is actually a myth. If you look at the voting records of passive managers, they are no worse. In fact, they are actually slightly better. I’m not saying they’re perfect. I’m not saying there’s not room for improvement because there is, but their track record is actually slightly better than that of active managers on voting. For example, voting against excessive pay to CEOs and other board members, for example. Yeah, I actually don’t think the active-passive label is particularly helpful. The other reason I say that is that there are actually what I would call, still call passive funds that other people wouldn’t call passive funds. Maybe rules-based is a more appropriate name for them. I suppose I’m talking about, and again, I don’t like this phrase, but smart beta. I’m talking about value funds, small cap funds, momentum funds, and this sort of thing. And they are broadly passive, if you like. They are certainly rules-based. But that’s another way in which labels like active and passive aren’t necessarily particularly helpful. Also, it’s a very bad marketing term. Let’s face it. I mean, nobody likes to think of themselves as passive. Actually, if they read the academic evidence, they would actually realize that actually in the case of investing, passive is the way to be. A classic analogy that I like to give is an airline, an airline that’s in distress. Maybe there’s a, I don’t know, an engine that blows on a flight or a plane is in distress. I actually, I’m no expert by the way, I hope to explain on flight and airplanes, but what I am told is that The safest thing to do in extreme turbulence, for example, is to actually bring the plane down using a computer. Now, if the pilot were to tell all the passengers on the plane, guys, we’re hitting some really bad turbulence here, or the starboard engine has gone, we’re having to come down via computer. I’m just going to put my feet up now and let the computer take the strain. There would be an almighty scream from all of the, from all of the passengers. It’s only human nature that we actually want to have a human being in charge of bringing that plane down. But actually, if you look at the evidence and exactly the same applies to passive investing, if you like, which is sort of like leaving your investments to a computer, it is actually statistically much better for you.
Aoifinn Devitt: Well, some very interesting thoughts there that I look forward to sharing in the show notes. Let’s just go back to your personal story for a few final questions. I think we’re certainly getting at a creed you may have as it relates to passive versus active investing, but is there any other creed or motto that you let govern the work you do, the advocacy work, the education work you do, or maybe any words of advice that really stuck with you?
Robin Powell: Well, this is probably going to sound really pompous, but the people I tend to work with, the asset managers, the financial advisors, the journalists, the bloggers and so on, tend to be good people. They want to do the right thing. They want to tell the truth. And no one person in particular has told me that. I’ve kind of just seen everyone do it and decided this is the way it should be. Do the right thing. Tell the truth. Martin Luther King said, “The time is always right to do what is right.” Mark Twain, “If you tell the truth, you don’t have to remember what you’ve told everybody.” And actually, that’s so true of the investing industry that if you just tell people, even if it’s, “I don’t know,” and very often it is, “I don’t know,” it’s being honest with people. I don’t know what’s going to happen with COVID or what it’s going to do with the markets, or I don’t know whether Russia’s going to invade Ukraine and what that’s going to do, whether Boris Johnson’s going to lose his job and the FTSE’s going to go into freefall. It’s about being honest and about being truthful with people. I think if you start from that premise, apart from anything else, life is just much more pleasurable and pleasant and generally easier. Actually, I say easier. There are lots of people who don’t like people who tell the truth. And who are doing the right thing. But it’s much easier to live with yourself, put it that way, if you do the right thing and tell the truth.
Aoifinn Devitt: And I would just add to that, at the right time, i.e., as soon as possible, ahead of perhaps it getting out there. And you getting your truth out there upfront, I think that’s so much better than having to wait for it to be dragged out of you. Well, thank you so much, Robin. I think of you as an ultimate truth teller. I know that you normally sit on my side of the table, in your role, and I appreciate you letting me turn the tables on you. I do think that the work that you do, the truth you seek to reveal, and your persistence in uncovering what I think are these truths in the investment world is an inspiration and definitely makes our industry richer. So thank you so much for coming here and sharing your insights with us.
Robin Powell: That is very kind, Aoifinn, and it’s been a pleasure to be on your podcast.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
Aoifinn Devitt: Brought to you with the kind support of Federated Hermes Inc., a leading global investment manager. Guided by their conviction that responsible investing is the best way to create wealth over the long term, their investment solutions span equity, fixed income, alternative and private markets, multi-asset and liquidity strategies, and a range of separately managed accounts distributed through intermediaries worldwide. Our next guest believes that overconfidence and our love of a story has led us down the wrong path when it comes to choosing investment managers. Find out why next. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast. A podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Robin Powell, who’s a journalist, investor advocate, financial educator, and content consultant. He is head of client education at Rockwell, as well as editor of The Evidence-Based Investor and executive director of Regis Media and Ember. He is a frequent commentator on investment management and behavioral finance, often probing the purported value added by active managers. Advocating for better transparency and investor education. Welcome, Robin. Thanks for joining me today.
Robin Powell: Well, Aoifinn, thank you very much for having me.
Aoifinn Devitt: Well, we’ll start with where we always start, which is where did you grow up? What did you study? And how did you come to be so interested in the world of investing?
Robin Powell: I grew up in the Midlands, the English Midlands, but born in Staffordshire and went away to boarding school and then to Oxford where I studied history. And a lot of my contemporaries went into— well, we used to call it merchant banking. So they went off to make a a shedload of money and I went off to work in journalism, which is obviously not quite so well paid, but was something that I’d always wanted to do. And yeah, I worked in television for most of my mainstream journalism career, mainly for ITV, but also a little bit for the BBC and latterly for Sky News. And yeah, it was when I left Sky News and set up my production company, Ember Television, that we were asked by a wealth management firm to produce a documentary about investing and specifically passive investing. I’m actually not very comfortable anymore with that phrase passive investing, but that’s what we called it at the time. And I was absolutely fascinated that there is all this evidence out there that actually for the vast majority of investors, the best thing to do is just simply to buy the whole market through low-cost index funds, keep your costs as low as possible, and just sit there and ignore the noise and invest for the very long term. And yeah, I was so shocked, if you like, that the whole of the industry seems to kind of encourage people to do the very opposite, that I resolved at that point that I was going to be an investor advocate to try to help investors do the right thing.
Aoifinn Devitt: Well, we’re certainly going to dig into a little bit more of that in terms of the active-passive debate. A little bit later on. Can you just, before we go into some of the themes, what was the market backdrop like when you entered the industry? I mean, can you just paint a picture for us in terms of active managers, what was in favor, what were the hot tickets then?
Robin Powell: Right, okay. Well, I must say I am a latecomer to the investing industry. I mean, I’ve literally been in it for the last sort of 10 years, if you like. And I mean, I suppose 10 years ago, we were still recovering from the global financial crisis and financial services, the reputation of particularly big financial firms was at a pretty low ebb. Faith in capitalism, I suppose, and in the global financial markets to deliver good long-term reliable investment returns was at a low ebb as well. So in a sense, it was a good time for me to be getting involved because Certainly in America, index funds in particular, passive investing had been popular for quite a while since, I suppose, the turn of the century, but there had been an acceleration. And I think the financial crisis really focused people’s minds on how am I going to receive the best returns I possibly can. Here in the UK and of course in Ireland, it was a similar story in that We are far behind the United States in terms of our understanding of the kind of failure, the kind of industrial-scale failure of active management, if you like. But nevertheless, that was the start of a sort of growth curve, a slow growth curve for passive investing in Britain and Ireland.
Aoifinn Devitt: Well, I think we should just dig right in because we’ve got a lot of themes to cover. So there’s a recent article at the end of the year which suggested, let’s go to both the UK and the US in terms of active equity managers and whether they outperformed a passive alternative. It seems that only 34% of active equity funds beat the median passive in this year. That was according to AJ Bell. Yeah. And that this would have been UK funds. And then in the US, it seems like that number was only 22% of active North American funds beat the index. Is this a pattern that you are continuing to see?
Robin Powell: Absolutely. I mean, the first thing to say is obviously 12 months is no time period whatsoever to be making any decisions about your investment philosophy or to sort of form views about what works and what doesn’t work. The point is, Aoifinn, that that figure that you mentioned, a small proportion of active funds beating the index. I mean, let’s face it, you’d expect just simply by random chance that half of them would beat the index. So what we’re actually seeing is Fewer than half beat the index in any one given year. And of course, you and I and investors out there, we don’t invest for one year. We invest for 30, 40, 50 years. You know, our children will be investing for maybe longer than that, 60, 70 years. And all the evidence shows that over the very, very long term, only a very tiny fraction, somewhere around 1% of active managers actually do produce outperformance over the long term. And you might be thinking, well, that’s pretty simple then, Robin. I just pick the winners then. But the point is you’ve got to pick the winners in advance. We can all see who the winners have been in the past. We can all see who did well and who did badly last year. We have no idea who’s going to do well and badly this year. And as for the next 40 or 50 years, That’s anybody’s guess, to be honest.
Aoifinn Devitt: And how about if we look maybe across the different market caps, say large cap, small cap, mid cap? I can understand how it might be difficult to beat an index in a very efficient segment, say US large cap. Well, what would you say about emerging markets equities or maybe small cap UK?
Robin Powell: Well, you touched on that, that phrase market efficiency, and that really, really is a very important point. Markets are fundamentally efficient. We have willing buyers and willing sellers. Every single trade, there has to be someone at each end of the trade, if you like, and they both think they’re getting a good deal. Otherwise, why would they trade? Markets are efficient in that respect was actually a PhD thesis written by a French mathematician called Louis Bachelier in the year 1900, which showed that actually because of this equilibrium, if you like, in the markets, then in his own words, the short-term markets of the movement are anybody’s guess. He actually used the phrase, “No more predictable than the steps of a drunkard.” It’s a random walk. We have no idea where markets are heading and which stocks are going to do particularly well. Now, we can argue even until the cows come home about just how efficient markets are. The point is that they are sufficiently efficient to make it very, very, very difficult for anyone, even the smartest of smart fund managers, to beat the market over the long run. We hear this argument all the time that there are some markets that are so inefficient that actually they do offer opportunities for active managers. To an extent, it’s true, but you have to be there at the very beginning. In other words, when a developing market is really just at its kind of very embryonic stage. India is a classic example. A few years ago, people would tell me, ah, this stuff you’re writing, it might apply to Britain, it might apply to America, but it doesn’t apply to India. Yes, there was a stage where India was quite an under-researched— I think it was the phrase you used— an under-researched market, and it was possible for active managers to beat the index. But actually, if you look at the data now from the likes of Morningstar and S&P Dow Jones Indices, it’s actually just as hard, if not harder, to beat the Indian stock market than it is to beat the US stock market. This applies not just across countries, but across asset classes, small-cap stocks, value stocks, it also applies across fixed income as well. It is very hard for an active manager to outperform in the long run.
Aoifinn Devitt: Well, why do we still have an active manager industry then? What is it about active management that continues to attract investor capital? What do you think it is?
Robin Powell: This is the €6 million question really, isn’t it, Aoifinn? Because I wish I knew. And I think it’s largely down to human nature. We think we’re better than we actually are. We think we’re better than average drivers, but in aggregate, we can’t all be better than average. Some of us, I’m actually happy to hold my hand up here, are actually below average drivers, but you wouldn’t believe the bias that investors have. They think that they can beat the market. They think they can pick up the Irish Times or the Mail on Sunday here in the UK, follow the stock tips and beat the market just on the strength of a newspaper article. So overconfidence is a massive thing. The other thing is the active fund industry is a very, very powerful industry. It has a huge marketing and advertising budget. It spends massive amounts On newspaper advertising, big billboards in stations, on the side of taxis, asset managers, for example, will sponsor big sporting events, rugby matches, cricket matches. I’m sure it’s the same in Ireland as well. They’re everywhere. And the message is that by picking the right people, you can actually beat the market. But all the evidence says that that is not true. And then the final thing I would say, so I’ve mentioned human nature, I’ve mentioned the power of the industry, and the third thing, sadly, I would say that contributes to it is financial advisors. Financial advisors are very conservative with a small c. They have often built up large businesses or successful businesses, should we say, on the back of commissions, commissions paid by fund managers to sell their products. Now, those commissions were banned in the UK a few years ago under what’s called the Retail Distribution Review. As you know, in Ireland, you don’t yet have RDR, and to be honest, RDR in Ireland cannot come soon enough because that will level the playing field. And then the blarney, if some advisors come out with about active management being better than index funds, they won’t be incentivized to do that because they won’t be paid anymore for recommending active funds. They’re the main reasons why so many people still use active funds.
Aoifinn Devitt: And there’s also the allure of the story, isn’t there too? I mean, each stock has a story. The reason there’s an edge or an information edge usually has a story behind it. And we have so much to get through, but I’d love to know what you think on meme stocks. I mean, isn’t that evidence of the same?
Robin Powell: You’re absolutely right. Since the caveman and woman, stories is how human beings have communicated and got information over, persuaded people. Stories are very, very powerful and we are very partial to a story. We are not so good at maths, a lot of us. I certainly, speaking for myself, I don’t know whether we just sort of switched off in the kind of probability classes in maths at school, but people just don’t seem to get a grasp on the probability of outperformance, either by picking stocks or by picking funds. On average, you are likely to fail. I mean, meme stocks are a classic example. Meme you stocks, know, stocks that people talk about on social media. Very often stocks are talked up for a reason. People want to build the price up, you know, short sellers and so on are kind of waiting to pounce. It is a very bad idea, frankly, not just buying meme stocks, but buying individual stocks at all. There’s research by a guy in the US called Hendrik Bessembinder, and I’d encourage your listeners to look for it. It basically shows that about 4% of stocks actually beat the market and actually produce strong returns, if you like, in the long run. By strong returns, I mean better than US Treasury bills, US government bonds, if you like. And how the heck are we supposed to work out what that 4% of stocks is? You’ve basically got a 1 in 25 chance of picking one of the very few winners who are really going to drive market returns going forward. I mean, your Facebooks, your Googles, your Netflixes, that sort of thing. It’s very, very hard to identify them.
Aoifinn Devitt: I think you’re right. If COVID has taught us anything, it’s that the average person’s understanding of statistics is definitely not what it should be. Staying on some of the other issues that I see kind of crossing an average investor’s desk right now, we spoke about meme stocks and how about the current wave of democratization of more complex products such as alternatives, which are now increasingly being sold in smaller chunks. What are your thoughts on that?
Robin Powell: Well, this is a worrying trend. And I think broadly what is happening here, and I’m happy to admit people might think this is a cynical view, I don’t. The industry realizes that the game is up with public markets. They realize that the evidence, the data is completely irrefutable. It is very, very hard to pick a winning active fund manager in advance. And the way they’ve got around it historically is they frankly have been opaque about two things. First of all, the performance they produce, and secondly, the fees and charges that you incur for using those funds. So it’s an industry that’s been lacking in transparency. Thankfully, Aoifinn, regulators the world over, including in Ireland, are now getting to grips with that. And the public markets and fund managers who invest in public markets, they are now bound by much higher standards as far as transparency is concerned. We do not have that same level of transparency in hedge funds, for example. We certainly don’t have them in the likes of private equity and venture capital. It is so easy for a private equity fund manager to make it look that they are producing strong returns when they’re not. If I again could refer your listeners to research, there’s a guy called Professor Ludovic Palipau at the University of Oxford who has written extensively on private equity returns. He’s got a a website and a book in fact called PE: Private Equity Laid Bare. And it really just explodes all the myths about private equity. For example, there’s this claim that private equity produces better returns than public equity. Actually, the data shows that is not the case. The claim again is that there is an illiquidity premium attached to private equity. And to an extent, that’s true that there is an illiquidity premium, but once costs have been factored in, fees and charges, the data from Professor Philippou and others clearly shows that on the whole, private equity managers do not deliver the kind of outperformance that some people like to claim they do.
Aoifinn Devitt: Well, we’ll certainly put links to all of these pieces of research in the show notes, and thanks for bringing them to our attention. And this ties a little bit to a question around financial literacy in general, because I know this is something you feel strongly about, and obviously it’s enhanced if the transparency is there. So in a way, they’re two sides of the same coin, that we need the industry to be more transparent to fully be educated about it. But what do you think can be done in terms of ensuring better investor knowledge and better financial literacy?
Robin Powell: Well, it’s a really difficult one, isn’t it? Because who does it? Who provides the financial literacy education, if you like, and how is it paid for? Unfortunately, what we have is a kind of reluctance generally on behalf of states, nations to pay for financial literacy. So we have a lack of financial education in schools. We learn about all sorts of things which aren’t going to be useful in later life, but children aren’t taught about the basics of how the stock markets work, how to save, how interest works, and so on. So that’s a real concern. And another worry for me is frankly, a lot of the people who are kind of purporting to offer financial literacy education actually have a vested interest in, in a sense, misleading investors, particularly about the best thing to do. So a classic example would be stock picking contests. They’re very popular here in the UK. And it’s a way for asset managers to maybe use it to offset tax, make it look as though they’re providing valuable financial education service by going into schools and holding these stock picking contests. But they’re absolutely nonsense because generally they’re over the course of a term or an academic year. As I started by saying at the beginning of this conversation, a year is no guide to future returns. You are effectively gambling if you are picking stocks over the course of a school term or a school year. We shouldn’t be encouraging our children to gamble on individual stocks at all. So yes, it’s really important that the financial literacy is done by people who are actually qualified to do it and incentivized to actually tell people the truth about what’s best for them.
Aoifinn Devitt: And I’d love to get now to another area that we’re seeing quite a lot of product proliferation in the area, and that would be ESG. And I want to maybe bring in, A, what’s driving— what do you think of the recent surge of investor demand, and does the product proliferation concern you? Yeah, we’ll start with that, and then I’ll go to my second question.
Robin Powell: Well, product proliferation always concerns me. It is a massive problem. We’ve got far too many investment products, far too many investment products. And yeah, there is academic evidence to show that the more choices you give to consumers— and this isn’t just in the investing sphere, it’s everywhere— the harder it is for them to make a decision. Having said that, I am a big believer in ESG. I think, well, I think we all have to be, and particularly those of us who’ve got children or grandchildren, because the world, as we know, is facing a massive climate crisis. We have got to do something about it. And ESG investing is one way to do it. Now, I think there is a danger in overestimating the power of ESG investing. Yes, you can make a difference, but frankly, you’re not going to make a huge dent in climate change, even— well, unless we all invest this way. And I suppose eventually we will all be investing this way because I think what we’ll see in the years ahead is a kind of convergence between sort of mainstream investing and ESG investing. Frankly, if companies aren’t interested in climate change and what to do about it, they don’t deserve their place in the FTSE 100 or the S&P 500 or whatever. All companies are going to have to get their act together on the E, environmental aspect of ESG. Frankly, you can probably do more good for the environment and for your community and the world around you and helping to ensure that people are paid a decent wage and are employed in safe, humane working conditions, if you like. You can probably have more influence as a consumer than as an investor. But having said that, ESG is important. And also, let’s be clear, there’s no guarantee that it’s actually going to deliver any better results than investing in the opposite, which are often called sin stocks, you know, your polluters, your tobacco manufacturers, and so on. But I just think it’s an important thing that all of us ought to be doing.
Aoifinn Devitt: And I wanted to reflect back on the point you made earlier about getting increasingly uncomfortable with the word passive. I’m wondering where that comes from. Is this something to do with the fact that so-called passive managers are now engaging on issues like ESG and they are active in that sense? Or where does that concern come from?
Robin Powell: That’s a very good point, Aoifinn. I think a lot of people think passive investors equals passive shareholders or passive share owners who aren’t interested at all in what company boards are doing on environmental and social and governance issues. And actually, if you look at the academic evidence, we’ve actually got an article by with Gary Swedroe on my own blog, The Evidence Based Investor, about why that is actually a myth. If you look at the voting records of passive managers, they are no worse. In fact, they are actually slightly better. I’m not saying they’re perfect. I’m not saying there’s not room for improvement because there is, but their track record is actually slightly better than that of active managers on voting. For example, voting against excessive pay to CEOs and other board members, for example. Yeah, I actually don’t think the active-passive label is particularly helpful. The other reason I say that is that there are actually what I would call, still call passive funds that other people wouldn’t call passive funds. Maybe rules-based is a more appropriate name for them. I suppose I’m talking about, and again, I don’t like this phrase, but smart beta. I’m talking about value funds, small cap funds, momentum funds, and this sort of thing. And they are broadly passive, if you like. They are certainly rules-based. But that’s another way in which labels like active and passive aren’t necessarily particularly helpful. Also, it’s a very bad marketing term. Let’s face it. I mean, nobody likes to think of themselves as passive. Actually, if they read the academic evidence, they would actually realize that actually in the case of investing, passive is the way to be. A classic analogy that I like to give is an airline, an airline that’s in distress. Maybe there’s a, I don’t know, an engine that blows on a flight or a plane is in distress. I actually, I’m no expert by the way, I hope to explain on flight and airplanes, but what I am told is that The safest thing to do in extreme turbulence, for example, is to actually bring the plane down using a computer. Now, if the pilot were to tell all the passengers on the plane, guys, we’re hitting some really bad turbulence here, or the starboard engine has gone, we’re having to come down via computer. I’m just going to put my feet up now and let the computer take the strain. There would be an almighty scream from all of the, from all of the passengers. It’s only human nature that we actually want to have a human being in charge of bringing that plane down. But actually, if you look at the evidence and exactly the same applies to passive investing, if you like, which is sort of like leaving your investments to a computer, it is actually statistically much better for you.
Aoifinn Devitt: Well, some very interesting thoughts there that I look forward to sharing in the show notes. Let’s just go back to your personal story for a few final questions. I think we’re certainly getting at a creed you may have as it relates to passive versus active investing, but is there any other creed or motto that you let govern the work you do, the advocacy work, the education work you do, or maybe any words of advice that really stuck with you?
Robin Powell: Well, this is probably going to sound really pompous, but the people I tend to work with, the asset managers, the financial advisors, the journalists, the bloggers and so on, tend to be good people. They want to do the right thing. They want to tell the truth. And no one person in particular has told me that. I’ve kind of just seen everyone do it and decided this is the way it should be. Do the right thing. Tell the truth. Martin Luther King said, “The time is always right to do what is right.” Mark Twain, “If you tell the truth, you don’t have to remember what you’ve told everybody.” And actually, that’s so true of the investing industry that if you just tell people, even if it’s, “I don’t know,” and very often it is, “I don’t know,” it’s being honest with people. I don’t know what’s going to happen with COVID or what it’s going to do with the markets, or I don’t know whether Russia’s going to invade Ukraine and what that’s going to do, whether Boris Johnson’s going to lose his job and the FTSE’s going to go into freefall. It’s about being honest and about being truthful with people. I think if you start from that premise, apart from anything else, life is just much more pleasurable and pleasant and generally easier. Actually, I say easier. There are lots of people who don’t like people who tell the truth. And who are doing the right thing. But it’s much easier to live with yourself, put it that way, if you do the right thing and tell the truth.
Aoifinn Devitt: And I would just add to that, at the right time, i.e., as soon as possible, ahead of perhaps it getting out there. And you getting your truth out there upfront, I think that’s so much better than having to wait for it to be dragged out of you. Well, thank you so much, Robin. I think of you as an ultimate truth teller. I know that you normally sit on my side of the table, in your role, and I appreciate you letting me turn the tables on you. I do think that the work that you do, the truth you seek to reveal, and your persistence in uncovering what I think are these truths in the investment world is an inspiration and definitely makes our industry richer. So thank you so much for coming here and sharing your insights with us.
Robin Powell: That is very kind, Aoifinn, and it’s been a pleasure to be on your podcast.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces Podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
