Financial guru and Director of Research for BAM Larry Swedroe is not a big fan of active management.

Swedroe recently had a mini-debate with David Barse, CEO of Third Avenue Management, on Bloomberg GO on the topic of active versus passive investing. He decided to continue the debate in a written format, where he could take the time to provide more detailed argumentation and evidence regarding Third Avenue’s supposed “success” as an active investing firm.

Swedroe Third-Avenue-Management

Swedroe – Appropriate benchmarks for comparison

Given that Third Avenue calls itself a “value investor” in the tradition of Ben Graham, Swedroe argues that it is only appropriate to compare the returns of their funds to value indexes, not market indexes such as the S&P 500. In fact, most ideally for an apples to apples comparison, Third Avenue’s actively managed value funds should be stacked up against comparable passively managed value funds (with costs and trading expenses) across the same asset classes.

Swedroe decided the best way to find out if Third Avenue is really outperforming passively managed funds is to compare the returns of the Third Avenue Small Cap Value Fund (TASCX), the Third Avenue International Value Fund (TAVIX) and the Third Avenue Value Fund (TAVFX)—to the comparable funds run by Dimensional Fund Advisors, and, where available, to a comparable Vanguard index fund. (Swedroe notes that his employer Buckingham recommends DFA funds for most client portfolios.)

Weak results compared to benchmarks and no alpha

[drizzle]Keep in mind that Morningstar classifies TASCX as a small value fund. For the 10- and 15-year periods ending October 13, 2015, TASCX produced a return of 5.20% annually and 8.34% annually, respectively. However, the fund’s percentile rankings over those periods were 90 and 91, meaning TASCX fund underperformed all but 10% of small value funds.

Of note, DFA’s U.S. Small Cap Value Fund generated a 7.49% annual return over the 10-year period (beating TASCX by an average of 2.29% a year) and 10.94% per year over the 15-year period (beating TASCX by an average of 2.60% a year).

The Vanguard Small Cap Value Index Fund also outperformed TASCX. Over 10- and 15-year periods, the Vanguard small cap value fund returned 8.37% per year (outperforming TASCX by 3.17% annually) and 9.92% per year (beating TASCX by 1.58% a year).

In his analysis, Swedroe also points out that TASCX is mostly a domestic fund, but it can and does occasionally international stocks (non-U.S. stocks currently represent close to  5% of assets). The ability to purchase international stocks when they look like a better value should be a big edge for TASCX, but apparently not. By the same token, DFA’s International Small Cap Value Fund also beat TASCX over both periods, producing a 6.31% per year over the 10-year period (compared to 5.20% for TASCX) and 11.16% a year over the 15-year period (relative to an average of8.34% for TASCX).

Swedroe goes on to hammer other underperforming Third Avenue funds in his analysis, and then slams Third Avenue in the conclusion to his blog: “Not only did Third Avenue’s funds fail to outperform in each of the cases we analyzed, they underperformed by wide margins. Maybe, just maybe, alpha is a lot harder to deliver than many—including David Barse—think. The Third Avenue funds we looked at certainly weren’t generating alpha or beating appropriate benchmarks.”