For years, advisers like you and service providers like me have been defending evidence-based investing against the opposite of it: Active vs. passive. Alpha vs. beta. Rational vs. emotional. Scientific vs. speculative. Market timing and stock picking vs. risk factors and diversification.
Call it what you will, ours has long been a relatively black and white conversation about “us” vs. “them.” It’s a conversation we’ve gotten good at too, as we state the case for keeping market efficiencies high, unnecessary expenses low and human emotions in check. By keeping our message loud and clear through the years, we’ve been winning over an increasing numbers of investors, fellow advisers, fund providers and even the financial press.
So, congratulations, we’re winning! That’s good news. But I believe it’s also the fuel that’s igniting a new communications challenge. Our black-and-white messages may no longer suffice. These days, expect a finer shade of gray in your conversations, with more nuanced variations on the theme of active vs. passive investing.
As an example, consider this recent article by Morningstar’s John Rekenthaler, “Indexes Can Be Passive, Active Can Be Indexes, but Passive Can’t Be Active.” The fund flow chart shows clearly that we seem to be winning the passive vs. active debate. But for crying out loud, could the piece be less clear about who “we” are? Here is a similarly muddled message that ran recently in InvestmentNews, entitled “Advisers pouring more money into smart beta funds.”
In some respects, it’s the same old misunderstandings about what evidence-based investing is really about. But such attempts to gloss over an increasingly crowded field – with unsolicited lessons in the Greek alphabet thrown in – opens all-new ways to confound investors and advisers alike.
A Call to Evidence-Based Arms
This is why I feel it’s becoming increasingly critical to embrace the term evidence-based investing as “our” term. I believe it’s one you should use early and often – so you can continue to stand apart from not only traditional active management, but from an evolving and more confusing world of “close, but no cigar” strategies that have been getting lumped into the same space you’re in, often with similar nomenclature.
Your long-standing advice is not cut from the same cloth as a quant shop that is recommending an 81-factor portfolio based on some in-house analytics that their factor-factory whiz-kids came up with last week. (And if you think I’m making this up, check out this article by Jason Hsu, “Finding Smart Beta in the Factor Zoo.”)
But we can hardly blame the public if they presume that we are all one and the same. Increasingly, it’s not just the fact that you’re using factors or asset classes to build your clients’ portfolios. It’s not just that you’re managing costs and espousing diversification. It’s not only because you’re eschewing market-timing and stock-picking.
It’s that you are doing all of these things and more based on the best available evidence you can find.
That means you’re heeding robust studies that have been well-supported by meticulously structured, replicated and repeated academic inquiry. It means you’re favoring practical applications that have been thoroughly road-tested, with historical track records spanning decades of multiple market climates.
It also means you remain open – in word and deed – to incorporating the newer findings, when and if the evidence is sufficiently compelling. And it means becoming practiced at describing how your strategy is formed from and informed by not only dusty books of data, but a living and evolving body of practical and academic evidence.
Sharing the Finer Shades of Gray
Crafting these sorts of essential conversations calls for a delicate balance. This is one of many reasons I’ve dedicated my business to helping you find and maintain your communication balance when describing evidence-based investing and related subjects. This is easily a full-time job, not to mention a fascinating and important one. These are additional reasons why I’m in it for the long haul, alongside you and your firm.
May I take a moment to remind you that my Content-Sharing Library, likewise dedicated to the evidence-based adviser, has been recently upgraded to an improved platform for easier navigation? There, you’ll find a growing collection of content designed to help you add clear value to your client experience, in a world that is often more gray than it is black and white. Stop by the Library and give it a browse soon.