I am waiting for my meal here in Spain. They drive fast here, but table service certainly falls into the slower category. This is day 23 for me on the Camino and looking to kill some time before my food gets here, thought I’d try writing something pertaining to the real world. I need to see if I can handle more sophisticated decisions than which hostel to stay at or Sangria versus San Miguel. So, thought I’d share this story.
A little ways out of the beautiful town of Astorga, the universe brought me together with a mutual fund wholesaler from the US (poor guy was looking for peace on the Camino. Well, I decided to help him find some answers). He worked with one of the large mutual fund companies that has recently put their toe in the water of smart beta type investing. He used the term “evidence based investing” as well, referring to a term used by many financial advisors.
I always had issues with this term…evidence based investing. Yes, the evidence tells the truth, but that’s not what “it” is. Evidence is just the result. We call gravity…gravity! We don’t refer to gravity as “things consistently falling to ground when dropped”. Falling to the ground is what gravity causes, just like market forces cause what we refer to as evidence based investing. The “evidence” just comes from the pricing mechanism of a well functioning marketplace. So, for lack of a better term, let’s just call it “nature” for now. It’s just how markets work. All markets. Nature! No need to get clever. Rather than get sophisticated sounding, why don’t advisors keep it boring, call it what it is, and then just educate their clients on the truth? Nobody is going to pressure you on fees for delivering market rates of returns. Actually, educate them and make them understand the truth, and they’ll probably never question your value.
See, investing is a lot like dieting. There are tons of expensive and complex plans out there to help one lose weight, yet the only formula one needs is actually very cheap and elegantly simple – eat better and excercise more. A perfect segway to that other word on the list, Smart Beta. This was the point where the mutual fund salesmen rescinded his offer to buy me a beer at the next Albergue.
Smart Beta is a term coined by smart marketing folks I told him, not smart investors. These are folks who know the truth is “nature”, yet they still kind of need to charge “unnatural fees”.(he wasn’t a fan of that comment!). Smart Beta is just the more sophisticated and expensive dieting plan that adds the sound of complexity to – eat less and excercise. It’s marketing justification to charge more for “nature”, rather than just admitting what it is and charging accordingly. The term Quantitative Investing is no different (Dimensional gets thrown into these buckets unfortunately, but in my opinion is vastly different because of their belief in markets. Dimensional accepts “Nature” , doesn’t rename it anything sophisticated, develops expertise in how to best deliver it, and then charges accordingly. NOTE: I used to work at Dimensional. Note: I no longer work at Dimensional and still say this.
We all within the industry need to let go of old habits and rise above our insecurities. Its ok to just deliver market rates of returns. Its what you are supposed to be doing. Trying to beat the complex pricing mechanisms of such a large marketplace sure seems to be foolish (performance data of all manager performance more than confirms this) , but admittedly end investors may need to be educated…because everything they see or hear on TV still paints the traditional definition…or in this case, now it’s expensive camouflage of “nature”.
I’m just a dude with an opinion…and I can’t wait for American food.