Howard Marks discusses Passive and Active going forward

[Hariseldon58]

Interesting post from Howard Marks

Apologies if that has already been linked to, I found it interesting...

https://www.oaktreecapital.com/docs/default-source/memos/investing-without-people.pdf?referrer=email

[Lootman]

"Not everything that can be counted counts, and not everything that counts can be counted"

Einstein or not, that's an elegant expression of the limits of a purely numerical analysis of securities. It's hard for an active individual investor to beat the computers just using numbers, but it is possible to have a qualitative outlook that other market participants miss.

I'm not so concerned about the idea that ETFs could prove illiquid, as long as one limits oneself to major-market cap-weighted ETFs. But the more illiquid the underlying, the more an ETF might deviate from NAV during market dislocations.

[bungeejumper]

Howard Marks? You had me worried there for a moment. The way I recall it, most of his investments went up in smoke.

BJ

[LooseCannon101]

Investment trusts sometimes trade at quite wide discounts to their Net Asset Value, so why not real ETFs?

I make the distinction between real and synthetic ETFs, with the latter relying on the financial strength of the counterparty e.g. a bank.

ETFs are a recent phenomenon which haven't been properly tested in a financial crisis. They are as Howard Marks says extremely popular which usually attracts sharks feeding on unsuspecting retail investors.

If a highly diversified fund is held for the long term e.g. 20+ years, then any bias that a passive fund might have for favouring the most popular stocks, should mean revert as that popularity waxes and wanes.

If everyone is using Artificial Intelligence in the future, we should be on a level playing field, assuming that the participants play by the rules, with no malpractice e.g. insider-trading and opaque fee structures - some hope considering past history!

[hiriskpaul]

Investment trusts sometimes trade at quite wide discounts to their Net Asset Value, so why not real ETFs?

ETFs do sometimes trade at wide discounts to NAV during periods of major market turmoil. The NAVS are quickly closed at though, typically within minutes/hours, because there is an inbuilt arbitrage process. There is no arbitrage process with ITs, which is why wide discounts and premia can persist indefinitely.

ETFs are a recent phenomenon which haven't been properly tested in a financial crisis. They are as Howard Marks says extremely popular which usually attracts sharks feeding on unsuspecting retail investors.

I assume you are joking here. Surely you remember 2007/8?

If a highly diversified fund is held for the long term e.g. 20+ years, then any bias that a passive fund might have for favouring the most popular stocks, should mean revert as that popularity waxes and wanes.

I don't really understand that statement, but would point out that for fully replicated cap weighted portfolios, there is no favouring of popular stocks. This is the reason such funds are so scalable.

If everyone is using Artificial Intelligence in the future, we should be on a level playing field, assuming that the participants play by the rules, with no malpractice e.g. insider-trading and opaque fee structures - some hope considering past history!

I would be astonished if everyone ends up using the same AI code.

[formoverfunction]

Thanks for the read.

[formoverfunction]

"things like distressed debt, direct lending, private equity, real estate and venture capital."

My portfolio includes elements and holdings of the above already, both listed and unlisted.

It did stop me to think about how much of my 'listed" portfolio was in ETF's. Around 20%.

Interestingly, they were all the most profitable positions, followed by PE & VCT investments.

Mainly because I only ever buy them when there's almost blood on the street or when they are really discounted.

Buying IWRD and ISF in the eye of the credit crunch, felt like an obvious choice, both from an long term perspective and safety. At the time I think I think one well known USA institution, it might have been Harvard, was following a "buy the world" strategy. I did the same with IWRD.

PEY, I seem to remember buying at a 30% discount to NAV and some of the VCT's (second hand) with 40% discounts and yields in excess of 10%

- almost a decade later, they've returned my capital and provide a reasonable income flow.

[BusyBumbleBee]

If everyone is using Artificial Intelligence in the future, we should be on a level playing field

But my intelligence is not artificial so I won't be using AI - a much over hyped abbreviation for what (at the moment) is some Techie's coding.

[Hariseldon58]

I think his comments/concerns on AI and related matters could well relate to Smart Beta strategies. If a large number of ETFs target Value for example by a numeric approach to Yield , P/E, Sales to Market , Price to Market or whatever, then the weight of money may well reduce the return factor and perhaps even have the opposite effect.

When a measure becomes a target....