Billionaire Howard Marks said the rise of index funds and computer-driven trading are reducing the role of people in the markets but creating room for a select few money managers to excel. Chris Davis, chairman and portfolio manager at Davis Advisors, joins Bloomberg’s Lisa Abramowicz to discuss the values of active management of funds. (Source: Bloomberg)
Chris Davis Lays Out The Advantages Over Passive
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Oaktree Capital’s Howard Marks added fuel to the argument that active management can be superior to be passive approach he wrote in a memo this week. The vast growth of BT apps and their popularity has coincided with the market rally that began roughly nine years ago. We haven't had a meaningful chance to see how they function on the downside. It's not hard to imagine the popularity that fuelled the growth of ETF in good times working to their disadvantage in bad times. We are joined now by Chris Davis chairman and petroleum manager at Davis advisors and Chris you are a human being you specialize in active management. What's your take on Howard Marks his views that were expressed that anybody that that's studied Howard Marks over the decades knows that it's usually a mistake a loser's game to be on the other side of Howard. He's got it incredibly comprehensive view and here he's obviously right. I I'll give you an existence proof we have only five strategies at our firm. One is almost 50 years old one is over 25 years old ones over twenty ones over. We're approaching 15 and one's around 10. All five of them have outperformed the indexes after fees since we started them and outperform their peers. All right. One thing that's interesting is that Howard Marks was using ETF almost synonymously with passive management. So how can ETF be translated into something that represents the Activ but with a more tax efficient Panner or rapper.
Well I think we were really the first and so far really the only true proven the active manager to offer our services in a true form completely transparent and I think we had some advantages that made it possible for us to do so. Were already low cost so we didn't have to worry about fee arbitrage where by and large large cap investors we have generally low turnover and a culture of transparent. I just want to show you what you're looking at because this is really quite an amazing chart. This is the flows or in this case out of actively managed equity ETF. People do not like that. Those are flows out negative negative negative. Why. Well this is. This is a tsunami and of course as a long term investor you know that looking at the herd when they're galloping one way and considering the other direction is usually sort of the root cause of success. This has turned into a tsunami and you get in a lot of trouble with a good premise by carrying it too far. After all you would never lost money in single family residential real estate your home was your best investment guaranteed to make you rich. That was true it was true is true until everybody galloped in. And I think that's what's happening with passive versus active. We have an advantage that we're owner operators we're managing our own money. We can do it for a big crowd or a small crowd but we're going to stick to the fundamental view that judgment and experience are advantages when you're a fiduciary for somebody else's savings. You just made an analogy somewhat tacit analogy between subprime mortgages and passive ETF. I'll let that stand there.
One thing I want ask you about is that we have not seen the same kind of tsunami out of active bond funds and even active Bond NTFS have seen inflows in recent months. Why have active managers in the fixed income space been more immune to the passive wait. Well it surprises me because I think people in fixed income feel that active management can add some value. What's amazing is if you look globally we run a worldwide ETF D.W. L.D. and an international D.A. Davidson International. And when you look at international indexes the active managers on average have outperformed in all time periods. It's sort of amazing that people believe that passive investing because it's done well domestically it must be true globally. It is not true even for the average manager internationally. So I think that's where you're going to see the biggest mindset adjustment. I think you've seen some in fixed income where people somehow believe that active management can add value and yet they don't look at the overwhelming data in global equities where the average manager has outperformed for all periods and they still somehow the passive is a better strategy. Do you think that the wave in general too passive has made your job easier to outperform. Absolutely. Absolutely. You can't peculiar inefficiencies we when a company just a few weeks ago that spun out a division of that company the spinout company was removed from every index the large cap the mid-cap the small cap. It wasn't put into the Index it fell to something like four times earnings. So you get these strange anomalies that I do think happened.
So although this is tough for our business in terms of asset gathered it's wonderful for our investment returns and we make better more money with 10 percent better performance and 10 percent more assets under management. So we're fine with this continuing for years to come.