Me Active, You Index

Finance experts don't necessarily invest as they advise.

John Rekenthaler 17 March, 2016 | 17:12
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Richard Thaler, the 2015 president of the American Economic Association, agrees with Nobel laureate Eugene Fama that retail investors are best off owning index funds. Warren Buffett gives similar advice, as does David Swensen, Yale's chief investment officer. Harvard professor Andre Perold serves as a director for the bastion of indexing, Vanguard.

Yet, while advocating indexing, four of those five are unquestionably active investment managers. Thaler is a principal of Fuller & Thaler Asset Management, which runs institutional monies in addition to subadvising on a mutual fund. Buffett, of course, runs Berkshire Hathaway's (BRK.B, listed in the U.S.) stock portfolio. For their part, Swensen and Perold both allocate their assets actively (Swensen for Yale's endowment fund, Perold for his advisory firm's clients), frequently by using actively managed funds.

The fifth, Fama, is not fully an active manager, but he's more of one than you would think, given that he's the person dubbed by Wikipedia as "the father of the efficient-markets hypothesis." Fama is a consultant and director for Dimensional Fund Advisors--a company that describes itself as active. True, DFA creates indexes for its funds, but these indexes reflect DFA's beliefs. And DFA portfolio managers make active decisions. For example, they may bypass a stock that joins their fund's index, if they believe that issue to be distressed.

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John Rekenthaler  is vice president of research for Morningstar.

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