Oct 28, 2022

Episode 103: Picking an Active Manager, Raising the OAS Clawback Ceiling, and Trading Hertz

Welcome to another episode of the Rational Reminder Podcast! Today’s main topic is how to pick an actively managed fund to invest in despite funds of this type producing lower returns than passive ones! Before getting into that, we hear a few updates on Ben’s research into dollar-cost averaging versus lump-sum investing, discuss the factors that influence choice making found in an amazing new book by Sheena Iyengar, and touch on an OSC report on QuadrigaCX being a big Ponzi scheme! We get into our main topic next, introduced by the point that while Peter Lynch managed the Magellan Fund so well, none of its investors made any money out of it. We talk about the decrease in popularity of actively managed funds and Ben attempts to find out if it would be possible to sketch out a framework for picking one despite this. He does this by firstly defining active and passive investing and then tracing the evolution of the definition of Alpha (excess risk-adjusted returns) found in different key papers, where at each new contribution to the definition, the window for actually achieving Alpha gets smaller. Finally, we end with a framework but you’ll find out how it falls short of being able to narrow the definition of a sensible actively managed fund to invest in down beyond a certain point. From there, we get into some amazing OAS clawback retirement hacks that could earn you a lot of extra income and wrap up with a glance at the bizarre upsurge in Robinhood investors in now-bankrupt Hertz since the pandemic!

 


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Key Points From This Episode:

  • Updates about Ben’s work, fans of RRP, and brilliant upcoming guests! [0:00:40.1]

  • Discussing The Art of Choosing and its meditations on factors that impact choice. [0:05:11.3]

  • Findings of an OSC report about QuadrigaCX being a Ponzi scheme. [0:11:00.6]

  • An article on Peter Lynch and why Active Fund Management doesn’t work. [0:14:53.4]

  • A framework for picking an active fund; defining active/passive investing and Alpha. [0:20:40.9]

  • An evolving definition of Alpha showing active fund management doesn’t often produce it. [0:24:11.3]

  • Findings of a 2017 Vanguard paper that help identify Alpha in actively managed funds. [0:36:20.3]

  • When an active fund is less bad: it is low fee, low turnover, and invested in small-cap value stocks. [0:43:43.3]

  • Adding a criterion to active funds to invest in: those that aren’t that big. [0:44:46.3]

  • The last piece to consider when finding an active fund: active share concerning your belief in the manager. [0:46:29.3]

Links From Today’s Episode:

The Four Pillars of Investinghttps://amzn.to/2AJc0lO

Rational Expectationshttps://amzn.to/2UTLuxg

The Intelligent Asset Allocatorhttps://amzn.to/30VW7Dl

Economics for Everyone https://amzn.to/2URyk3u

The Art of Choosing https://amzn.to/2UTvoUd

QuadrigaCX Report by OSC — https://www.osc.gov.on.ca/quadrigacxreport/web/files/QuadrigaCX-A-Review-by-Staff-of-the-Ontario-Securities-Commission.pdf

RRP with Michael Sonnenshein — https://rationalreminder.ca/podcast/83

‘One of the Most Successful Active Managers of All Time Shows Why Active Management Doesn’t Work’ — https://retirementresearcher.com/occams-razor-one-of-the-most-successful-active-managers-of-all-time-shows-why-active-management-doesnt-work/

Gerry Coleman — https://www.theglobeandmail.com/globe-investor/investment-ideas/gerry-coleman-money-manager-of-the-decade/article4304348/

Robert Krembil — https://www.theglobeandmail.com/globe-investor/investment-ideas/trimark-chief-did-it-his-way/article767561/

‘The Performance of Mutual Funds in the Period 1945-1964’ — https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244153

‘The Cross-Section of Expected Stock Returns’ — https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1992.tb04398.x

‘The relationship between return and market value of common stocks’ — https://www.sciencedirect.com/science/article/abs/pii/0304405X81900180

‘On Persistence in Mutual Fund Performance’ — https://www.jstor.org/stable/2329556?seq=1

‘In Pursuit of Alpha: Evaluating Active and Passive Strategies’

‘The Arithmetic of Active Management’ — https://www.jstor.org/stable/4479386?seq=1

‘Scale and Skill in Active Management’ — https://www.nber.org/papers/w19891

‘OAS Secrets for the High Net Worth’ — https://www.tewealth.com/oas-clawback-secrets-for-the-high-net-worth/

‘Hertz warns prospective new stock investors they’re all but certain to be wiped out’

About The Author
Cameron Passmore
Cameron Passmore

Cameron Passmore has been a leading advocate for evidence-based, systemic investing for over 20 years in the Ottawa area. Today, Cameron and his team serve a broad range of affluent clients across Canada.

Benjamin Felix
Benjamin Felix

Benjamin is co-host of the Rational Reminder Podcast and the host of a popular YouTube series.

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