If you missed the Jack Bogle and Cliff Asness interview on Bloomberg TV just now then you missed a pretty great discussion. Bogle and Asness are, arguably, the two most important people in the investment business today. Bogle is the founder of Vanguard and the leading voice in the “passive indexing” movement. Asness is the founder of AQR, a quant based asset management firm that runs more “active” strategies (asset allocation strategies) trying to generate better risk adjusted returns than the indices that Bogle says you should just hold.
Tom Keene was moderating the interview and did a fantastic job asking the right questions. I only wish he’d asked Bogle what is “passive” about choosing an asset allocation. As Asness noted correctly, anyone who deviates from the global cap weighted index, is making an active asset allocation choice, but neither Keen nor Asness directly noted that Bogle’s most famous investing style, “passive indexing” is largely a myth. That is, no one can actually buy the global cap weighted index because the product just doesn’t exist.
Anyhow, here are some highlights from the discussion:
- Both agree that future returns are going to be much lower than most people expect. The 8-10% returns of the past are not going to come to fruition. Bogle says 5-7% before fees would be a good return.
- Bogle says bonds are going to disappoint in the future as the current coupons point to returns in the future that simply cannot match the returns of the past.
- Asness argued that the financial sector has gotten too large.
- Bogle emphasized that fees are still too high.
- Both men agreed that ETFs are dangerous because they entice people to actively trade too much.
I basically agree with everything stated above. I probably fall somewhere between the two of them in terms of my philosophy as I see us all as active investors, but I also think that most “active” managers still charge way too much for their services. That places me very close to Bogle in terms of how important I place costs. And while Bogle’s “Cost matters hypothesis” is clearly right, I emphasize the “allocation matters most hypothesis” which states that our active decisions to allocate assets are actually the most important driver in future returns. By definition, this active allocation choice drives our returns and makes us all active investors to some degree….