On the Wings of an Eagle
I’ve always liked Jack Bogle, although I’ve never met him. He’s got heart, but as he’s probably joked a thousand times by now, it’s someone else’s; a 1996 transplant being the LOL explanation. He’s also got a lot of investment common sense, recognizing decades ago that investment managers in composite couldn’t outperform the market; in fact, their alpha would be negative after fees and transaction costs were factored in. His early business model at Vanguard promoting index funds was a mystery to me for at least a few of my beginning years at PIMCO. Why would most investors be content with just average performance, I wondered? The answer is certainly now obvious; an investor should want the highest performance for the least amount of risk, and foralmost all measurable asset classes, index funds and many ETFs have done a better job thanalmost all active managers primarily because of lower fees.
The “almost all” caveat is the reason I can write so freely and with such high praise for Vanguard. I am, after all, supposed to be promoting PIMCO in these Investment Outlooks, and PIMCO is a $2 trillion active manager with lots of long-term consistent alpha. Jack marvels about what he himself labeled in a recent Morningstar interview the “PIMCO effect.” To paraphrase his interview, he spoke to index managers beating almost all active managers, but then “there was the PIMCO effect.” We at PIMCO thank him for that with a “back atcha, Jack!” There’s actually a place for both of our firms and investment philosophies in this age of high finance. If Bogle’s concept of indexing was metaphorically similar to finding a cure for the cancerous devastation of high fees, then perhaps PIMCO’s approach could be similar to mapping the investment genome and using it to produce consistently high alpha. There’s room for each of these investment laboratories. I will admit that there are other active management labs as well that are worthy of not only recognition, but investor confidence and dollars. I have nothing but the highest of praise for Bridgewater’s Ray Dalio and GMO’s Jeremy Grantham and their staffs. Their voluminous thoughts occupy a special corner of my desk library. Each has a distinctly different approach to active management – Dalio’s focusing on a levering/delevering template and Grantham’s on a historical reversion to the mean for most asset classes.