Nakano Asset Management's 'quality growth' active funds?

[Tsumitate Wrestler]

I wouldn’t touch it with a barge pole.

You're very wise. After all, this particular company hasn't demonstrated their stock picking skill at this point and their expense ratio is several orders of magnitude higher than an index fund.

I'm keeping an eye on them though, bearing in mind this observation about the active/passive discussion in Jesper Rangvid's From Main Street to Wall Street - How the Economy Influences Stock Markets and What Investors Should Know (Oxford University Press, 2021). https://rangvid.com/MainStreetWallStreet.html

The active/passive discussion has a certain element of philosophical thinking to
it. For prices to exist, trading is needed. It is only when a trade happens that a price
is determined. For prices to adjust, someone must make an active decision. But, if
everybody is passive, who sets the price? Who distinguishes good firms from bad
firms? Basically, if everybody turns passive, who makes sure that capital markets
function? This has an interesting implication: the more passive investors there are,
the easier it is for active investors to outperform. If few investors follow firms, it
becomes relatively easier to gain informational advantages as an active investor,
and thus also relatively easier to outperform. Pastor & Stambaugh (2012) were
first to articulate this. So, when active managers struggle to demonstrate value-
for-money, there are good reasons why more and more investors become passive.
On the other hand, the more is invested passively, the higher is the likelihood that
an active manager will outperform.

Lesson 4. It is difficult to find outperforming active mutual funds. Hence, many
investors are turning passive. The more passive investors there are, however, the
easier it should be for active investors to outperform.

I think you may be making some fundamental errors here. Active management underperforms in almost all scenarios.

I would suggest this short video which summaries many of the key ideas surrounding the argument.

https://youtu.be/MOjS2zuQMdo

[Deep Blue]

I wouldn’t touch it with a barge pole.

You're very wise. After all, this particular company hasn't demonstrated their stock picking skill at this point and their expense ratio is several orders of magnitude higher than an index fund.

I'm keeping an eye on them though, bearing in mind this observation about the active/passive discussion in Jesper Rangvid's From Main Street to Wall Street - How the Economy Influences Stock Markets and What Investors Should Know (Oxford University Press, 2021). https://rangvid.com/MainStreetWallStreet.html

The active/passive discussion has a certain element of philosophical thinking to
it. For prices to exist, trading is needed. It is only when a trade happens that a price
is determined. For prices to adjust, someone must make an active decision. But, if
everybody is passive, who sets the price? Who distinguishes good firms from bad
firms? Basically, if everybody turns passive, who makes sure that capital markets
function? This has an interesting implication: the more passive investors there are,
the easier it is for active investors to outperform. If few investors follow firms, it
becomes relatively easier to gain informational advantages as an active investor,
and thus also relatively easier to outperform. Pastor & Stambaugh (2012) were
first to articulate this. So, when active managers struggle to demonstrate value-
for-money, there are good reasons why more and more investors become passive.
On the other hand, the more is invested passively, the higher is the likelihood that
an active manager will outperform.

Lesson 4. It is difficult to find outperforming active mutual funds. Hence, many
investors are turning passive. The more passive investors there are, however, the
easier it should be for active investors to outperform.

People have been reiterating Lesson 4 for a couple of decades. We’re no nearer active managers outperforming passive over any sensible time frame.

The counter argument is once passive grows big enough (some will argue it’s already happening) active management becomes even harder as the sheer weight of passive or dumb money keeps the momentum running and active managers can’t win by trying to find undervalued companies as the undervaluation will never close.

[adamu]

Lesson 4. It is difficult to find outperforming active mutual funds. Hence, many
investors are turning passive. The more passive investors there are, however, the
easier it should be for active investors to outperform.

It doesn't follow, because c.f. the Monevator article, for every active winner there must be an active loser (in terms of the average). Better hope you're a winner. Of course, everyone thinks they are.

https://monevator.com/is-active-investi ... -sum-game/

[captainspoke]

Isn't my decision to hold an action, too?

Maybe it's the shareholders who are not selling that have more impact on price/price movement.


(a version of what Deep Blue said about passive/dumb money)

[ChapInTokyo]

I wouldn’t touch it with a barge pole.

You're very wise. After all, this particular company hasn't demonstrated their stock picking skill at this point and their expense ratio is several orders of magnitude higher than an index fund.

I'm keeping an eye on them though, bearing in mind this observation about the active/passive discussion in Jesper Rangvid's From Main Street to Wall Street - How the Economy Influences Stock Markets and What Investors Should Know (Oxford University Press, 2021). https://rangvid.com/MainStreetWallStreet.html

The active/passive discussion has a certain element of philosophical thinking to
it. For prices to exist, trading is needed. It is only when a trade happens that a price
is determined. For prices to adjust, someone must make an active decision. But, if
everybody is passive, who sets the price? Who distinguishes good firms from bad
firms? Basically, if everybody turns passive, who makes sure that capital markets
function? This has an interesting implication: the more passive investors there are,
the easier it is for active investors to outperform. If few investors follow firms, it
becomes relatively easier to gain informational advantages as an active investor,
and thus also relatively easier to outperform. Pastor & Stambaugh (2012) were
first to articulate this. So, when active managers struggle to demonstrate value-
for-money, there are good reasons why more and more investors become passive.
On the other hand, the more is invested passively, the higher is the likelihood that
an active manager will outperform.

Lesson 4. It is difficult to find outperforming active mutual funds. Hence, many
investors are turning passive. The more passive investors there are, however, the
easier it should be for active investors to outperform.

People have been reiterating Lesson 4 for a couple of decades. We’re no nearer active managers outperforming passive over any sensible time frame.

The counter argument is once passive grows big enough (some will argue it’s already happening) active management becomes even harder as the sheer weight of passive or dumb money keeps the momentum running and active managers can’t win by trying to find undervalued companies as the undervaluation will never close.

This is certainly food for thought.

But if passive or dumb money by its sheer size bulldoze over any active or well informed money, then it is puzzling that institutional investors utilize active funds as part of their portfolios. It's quite possible that there is a diversification upside to having a part of a portfolio such as Japan growth stocks under active management.

From the same book quoted above:

US equity funds on average perform as well or better than their index before
fees, but, after fees, most active equity funds underperform (Fama & French, 2010).
There is a small group of funds that perform well, also after fees (Fama & French,
2010 and Kosowski, Timmermann, Wermers, and White, 2006). These funds are
difficult to find a priori but tend to be small-cap funds and growth funds (Grinblatt
and Titman, 1989), funds that deviate significantly from their benchmark
(Cremers and Petajisto, 2009), and funds that invest in asset classes that are less
followed, such as fixed income funds or equity funds from smaller markets (Berk
and Binsbergen, 2015). The reason these managers do well is that they acquire
skills regarding investments in firms in specific industries (Kacperczyk, Sialm,
and Zheng, 2005) or geographical locations (Coval and Moskowitz, 2001), and
are able to pick the right stocks in expansions and time the market in recessions
(Kacperczyk, van Nieuwerburgh, and Laura Veldkamp, 2015).

Lesson 3. You should pay attention to the size of fees. Active funds charge
higher fees than passive funds. Most active funds underperform their
index after fees, but there is a small group of active funds that tend to
outperform.

[ChapInTokyo]

I wouldn’t touch it with a barge pole.

You're very wise. After all, this particular company hasn't demonstrated their stock picking skill at this point and their expense ratio is several orders of magnitude higher than an index fund.

I'm keeping an eye on them though, bearing in mind this observation about the active/passive discussion in Jesper Rangvid's From Main Street to Wall Street - How the Economy Influences Stock Markets and What Investors Should Know (Oxford University Press, 2021). https://rangvid.com/MainStreetWallStreet.html

The active/passive discussion has a certain element of philosophical thinking to
it. For prices to exist, trading is needed. It is only when a trade happens that a price
is determined. For prices to adjust, someone must make an active decision. But, if
everybody is passive, who sets the price? Who distinguishes good firms from bad
firms? Basically, if everybody turns passive, who makes sure that capital markets
function? This has an interesting implication: the more passive investors there are,
the easier it is for active investors to outperform. If few investors follow firms, it
becomes relatively easier to gain informational advantages as an active investor,
and thus also relatively easier to outperform. Pastor & Stambaugh (2012) were
first to articulate this. So, when active managers struggle to demonstrate value-
for-money, there are good reasons why more and more investors become passive.
On the other hand, the more is invested passively, the higher is the likelihood that
an active manager will outperform.

Lesson 4. It is difficult to find outperforming active mutual funds. Hence, many
investors are turning passive. The more passive investors there are, however, the
easier it should be for active investors to outperform.

I think you may be making some fundamental errors here. Active management underperforms in almost all scenarios.

I would suggest this short video which summaries many of the key ideas surrounding the argument.

https://youtu.be/MOjS2zuQMdo

It's a good video. The guy knows what he's talking about. FWIW most of my portfolio is comprised of Vanguard index bond and equity ETFs. So it's a low fee strategy built on mostly passive ETFs.

[Tsumitate Wrestler]

It's a good video. The guy knows what he's talking about. FWIW most of my portfolio is comprised of Vanguard index bond and equity ETFs. So it's a low fee strategy built on mostly passive ETFs.

His stuff is great, and backed up by the most recent research. The podcast is very dry though..

This is certainly food for thought.

But if passive or dumb money by its sheer size bulldoze over any active or well informed money, then it is puzzling that institutional investors utilize active funds as part of their portfolios. It's quite possible that there is a diversification upside to having a part of a portfolio such as Japan growth stocks under active management.

Embrace your inner cynic. For managers and dealers, it is all about their cut of the fees. They do not care about their clients performance. They almost always underperform net of fees. Everyone gets a piece of the pie and the client is left holding the bag.

This is the way it has always been.

[Deep Blue]

Institutional investors have more capability to assess active managers than Joe Public. They can engage consultants, they can check return correlations between different manager styles, they have access to meet and quiz fund managers and can enjoy vastly lower fees than Joe Public pays for active management (think 20-25 bips).

Despite all these inherent advantages most institutional investors would still be better off passive and many more move in that direction every year.

[Tsumitate Wrestler]

Institutional investors have more capability to assess active managers than Joe Public. They can engage consultants, they can check return correlations between different manager styles, they have access to meet and quiz fund managers and can enjoy vastly lower fees than Joe Public pays for active management (think 20-25 bips).

Despite all these inherent advantages most institutional investors would still be better off passive and many more move in that direction every year.

Indeed!

5:14 17. Wealth does not give you access to market-beating investments.

https://youtu.be/MOjS2zuQMdo?feature=shared&t=313

[Tsumitate Wrestler]

Isn't my decision to hold an action, too?

Maybe it's the shareholders who are not selling that have more impact on price/price movement.


(a version of what Deep Blue said about passive/dumb money)

5:00 16. There is no such thing as a “passive” investment.

https://youtu.be/MOjS2zuQMdo?feature=shared&t=299

(This video has everything.)