6 min read

16/ Index Hugging; Chimerica; Explicit Content +

16/ Index Hugging; Chimerica; Explicit Content +
Wildlife photographer Sascha Fonseca uses a camera trap to catch a glimpse of the elusive ghost of the mountain.

Hi Everyone,

I recently read The Precipice by the Oxford University philosopher, Toby Ord. Compelling and highly recommended to understand the natural, anthropogenic and future risks facing humanity, whether the risks are existential, and what can be done. That we have achieved so much and so quickly, should inspire us to address the injustices and dangers that remain and that will endure. See also the recently released What We Owe The Future by Will MacAskill, another Oxford philosopher. Both are pioneers of the Effective Altruism movement which I came across a while ago but have only just recently started to investigate more seriously. My hunch is that many young do-gooders will jump on the bandwagon, which isn't a bad thing, but the impact it needs on a policy level will probably be limited for some time to come.

This week:

Doses of Finance -

  • 💰 A tip to make better decisions with active funds + James Anderson on the fund management industry

Sources of Interest -

  • 📖 A great essay on Chinese views of America + swear words in old England + Effective Altruism
  • 🎗 Snow Leopards

💰 Doses of Finance

Amongst the list of things wrong with a lot of the active fund management industry (underperformance, high fees, opaqueness etc.), there's something all investors (and advisers) can do to ensure they are making better decisions: not buying closet trackers.

Closet index tracking, or index hugging, refers to funds that are marketed as being actively managed (thereby charging a higher management fee), but are in fact just tracking an index, or deviating only marginally from an index.

In other words, you're paying an active manager to make active decisions. But, it turns out, they are lily-livered and scared of making a bad call so they stick with the flock.

It's like your partner telling you they'll make you a nice dinner only to pop to Tesco or Family Mart to pick up a ready made meal. If you don't feel cheated, you can simply skip to the next section.

In the past, some big names have been exposed of potentially selling funds that are closet trackers, including Schroders, Fidelity and JP Morgan. Generally, you can expect lower net returns and higher fees from closet trackers than from a genuinely actively managed fund.

So what can you do? If you're deciding between an active mutual fund or a passive index fund equivalent, take a look (if you can find it) at a number called active share, which is expressed as a percentage on any active fund. It tracks the disparity between a fund manager's holdings and that of its benchmark index. It's simple, easy to calculate and doesn't require any special formulas or assumptions.

A low active share indicates that a manager is closely replicating the index and is verging on a passive strategy. A high active share indicates that a fund's holdings diverge from the target index and there is genuine active management. You generally want an active share of more than 70%, otherwise you're paying someone to faff around with no conviction.

Some fund managers will of course hit back and argue that active share provides no indication of a manager’s ability to pick good stocks. Whilst there is some truth to this, I don't think a lot of them really have a leg to stand on when they present their long term performance relative to the benchmark and then try to justify their fees.

That being said, the context of the market the fund invests in does in a sense matter from an active share point of view. In a broadly diversified market like the U.S., an active fund manager can deviate from the index much more easily, without excessively diverging in terms of style or market cap. This is unlike a narrower market such as Italian or Singaporean equities, that have highly concentrated benchmarks and only a short list of constituents.

If you care to know more about the context of how active share differs depending on the market, I'd suggest reading this analysis about active share from a UK perspective.

For most people though, more analysis bears little significance when it would just be easier to understand the simple concept and not fall into the trap.

There are other arguments as to why a focus on active share is misplaced, some of which are justified. But I'll listen to those when there is statistical evidence that the majority of active managers outperform their benchmarks over a sustained period of time. Which probably won't happen anytime soon.

+👂 Masters in Business: James Anderson on Why Fund Management Is 'Broken'. Anderson is a legendary investor and partner at Baillie Gifford, the Scottish investing giant that manages $470 billion. He declares the fund management business to be ‘irretrievably broken’, observing “fund managers are addicted to the near-pornographic allure of earnings reports and macroeconomic headlines.” They are overly focused on short-term returns while failing to recognise that great companies take years to develop. [Listen: Apple | Spotify | Google | Bloomberg]


📖 Read

The Rise and Fall of Chimerica. This discursive essay was too good not to read twice. Jacob Dreyer, a writer based in Shanghai, argues that for China, America has primarily been a mere "idea" that subsumes a diversity of experiences, almost a utopian model to emulate. However, Dreyer delves into the Chinese intellectual universe and reveals how China's rise has coincided with a desire for it to realise its own true identity and emerge from its American shadow.

He questions whether the Chinese population is experiencing a fake reality, or an advanced society built on "Chinese essence", and how western political and philosophical ideas are being reshaped in the country as China offers both material and spiritual sustenance to its population.

"Despite the oppressive restrictions for most people, China this summer simmered with hopes for the future, a sense that certain things needed to change. But unlike previous times like this, America didn’t seem like the answer to any of the questions. Increasingly, China is not following in the footsteps of others, but charting its own path." I agree with this, but I know there are many who will not. Including those I speak to who want nothing more than the freedom to leave. But I guess they represent just a fraction of the national mindset, the majority of which approve of the actions the country has taken and the path on which it is going. [Noema]

+ Explicit Content. How people cursed back in the day. Swear words have always concerned what was either sacred or scatological. And nobody would have figured out what Shakespeare was trying to say when he made jokes in Hamlet about 'country matters'. As for the f-word, an early recorded use of it "was a piece of marginalia by an anonymous monk writing in 1528 in a manuscript copy of Cicero’s De officiis (a treatise on moral philosophy). The inscription reads: ‘O d fuckin Abbot’. Given that the use of the f-word as an intensifier didn’t catch on for another three centuries, this is likely a punchy comment on the abbot’s immoral behaviour." [History Today]

+ The Logic of Effective Altruism (2015). For anyone interested in moral philosophy, Peter Singer lays out the concept of effective altruism, based on the very simple idea that we should do the most good that we can. "Effective altruists will feel the pull of helping an identifiable child from their own nation, region, or ethnic group but will then ask themselves if that is the best thing to do. They know that saving a life is better than making a wish come true and that saving three lives is better than saving one. So they don’t give to whatever cause tugs strongest at their heartstrings. They give to the cause that will do the most good, given the abilities, time, and money they have." [Boston Review]. See also two of the best reviews I've read of What We Owe The Future [Boston Review, Astral Codex Ten].


🎗 Snow Leopards

In stark contrast to the logic of effective altruism, how about saving snow leopards? As my friends know, I've been fascinated with these mystical creatures for as long as I can remember. Get up to speed here, or visit the Snow Leopard Trust for information on their conservation work and donations.

Save the snow leopard!
The Snow Leopard Trust aims to better understand the endangered snow leopard, and to protect the cat in partnership with the communities that share its habitat.

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✍ Quote

The human race's prospects of survival were considerably better when we were defenceless against tigers than they are today, when we have become defenceless against ourselves.

Arnold Toynbee️


Thanks for reading.

I hope that some of these passages gave you something to think about or wallow in. Let me know which links or comments resonate with you, what you think of the newsletter, and if there's anything I can support you with.

Casper