Where’s The Beef?
I enjoyed  “Book Smart” in Parting Shot, (FA, January 2013) but could only wonder, “Where’s the beef?” I’m certainly no slacker when it comes to criticizing academics for presenting powerful papers with magnificent t-statistics that make no sense as they ignore the real world. That’s not the case in the active versus passive debate. Having recently co-authored a paper in the Journal of Investing on this issue, I know there are many “real world” studies questioning the value of active management. Among other issues, author Scott MacKillop misframes the debate with his interpretation of “efficient markets.” “Efficient market” does NOT mean “completely efficient,” but rather efficient enough that, over time and net of expenses (and taxes), the ability to consistently achieve superior risk-adjusted returns is, at best, very difficult. He also confuses the ability of finding “hidden opportunity from time to time,” with the ability to consistently find opportunities and avoid problems. After all, a stopped watch is correct twice a day.

 He argues that the critique of active management is wrong because:

“These academic studies simply do not mesh with my real-world experience.”

“He asks, are the markets “so efficient that a skilled active manager couldn’t find hidden opportunity from time to time? This idea flies in the face of our everyday, real-world experience.”

He asks, “why are book smart academics searching for evidence of manager skill having such a hard time finding it? …They are using the wrong tools.”

His position would be far more persuasive if he would provide a rebuttal with data using the “right tools.”
Harold Evensky, CFP, president
Evensky & Katz Wealth Management
Coral Gables, Fla.


Disservice Done
I felt that FA did a disservice to its readers by publishing February’s article “Avoiding the Next Train Wreck.”  The article had a skeptical tone on the use of trend following (TF), and implied misleading activity by TF money managers.  As fiduciaries, we are expected to put our clients’ interests first, and although there are “bad apples in every bushel,” implying TF techniques are hocus-pocus or that TF advisors do not take their fiduciary responsibility seriously is inappropriate.

Trend following is not “market timing” and comparing the two is just wrong. Trend following is a risk-management strategy that, when used correctly, is quite effective in producing alpha. Its focus is on protecting a portfolio from strong declines, reducing the correlation with a traditional buy-and-hold style. 

Our firm has used trend-following techniques quite successfully for many years.  In fact, our flagship strategy, “The One,” lost only 1.89% in 2008 versus the S&P 500 losing 38%+. Making light of this “one-time fluke” as the author does is just improper.  It has taken five years for the S&P 500 to get back to break-even after its tremendous decline. So while a buy-and-hold investor has been chugging along to get back to $0.00, a TF strategy missed the large drop and since then has been taking part in the gains. In our case, we have returned 79% after fees since 2008. By controlling risk, you outperform over time. It is an odd concept to wrestle with, that taking a defensive role actually creates more alpha, but clearly at our firm it works.

2008 wasn’t a fluke: Sharp declines happen every few years and our role is very clear. Capital preservation should be of upmost importance for a fiduciary. Risk control is why our clients hire us; they expect that we will protect them in volatile times. 

I rely on this magazine to present ideas factually with no bias so we can make informed decisions as to how a particular technology or strategy can fit into our infrastructure.  This article fell short of that.

Oh and by the way, in October 1987, we moved fully to cash on October 8, eight trading days before the dramatic decline. The signs WERE there and a well-developed system identified it and prevented the dramatic losses that most investors experienced.  You say balderdash; I saw happy customers.
Randall Mauro, RIA
Resnn Investments LLC
Denver, Colo.

For a longer version of this letter, please see letters posted as part of the March issue on fa-mag.com.