Back on Aug. 23, AllianceBernstein published a paper titled “The Silent Road to Serfdom: Why Passive Investing Is Worse Than Marxism.” The paper calls on policymakers to understand the role of active management in the allocation of capital, and argues there would be “costs to the system overall if active management suffers a catastrophic demise.”
Though I find the argument to be preposterous, only recently did it occur to me that it was actually Bernstein’s position that was worse than Marxism.
Rather than assume this was sour grapes from subpar performance, I dug into the AllianceBernstein 2015 10-K Annual Report. Deep in the schedules were flows of funds by asset type. Three things popped out in looking at the two-year numbers ending Dec. 31, 2015.
- It listed a substantial amount of its equities as “passively managed,” as well as some of its fixed income. Has it embraced passive investing?
- Its “equity actively managed” accounts showed “net long-term outflows” both years. Total actively managed assets increased slightly due to acquisitions and appreciation.
- Active equity and taxable fixed income seems to have underperformed the broad index funds.
In the chart below, I compare the market appreciation of AllianceBernstein’s active equity and taxable fixed income to the two largest index funds—the Vanguard Total Stock Index Fund (VTI) and the Vanguard Total Bond index Fund (BND).
In this admittedly imperfect comparison, AllianceBernstein comes out significantly short. Of course, I don’t know how much of the equity was invested in international or how much risk AllianceBernstein took with fixed income.
But I showed my results to an AllianceBernstein spokesperson, who replied that my methodology was “deeply flawed” and stated a better reference would be its quarterly disclosures of percentage of assets outperforming its respective benchmark.
Requests for specifics on my “deeply flawed” benchmarking went unanswered. I did, however, look at the third-quarter 2016 disclosure of “equity investment performance” that showed 43% of its equity assets outperformed the benchmark over the past year, and 63% over the past three years.
How can this longer-term discrepancy be explained? I suspect the devil is in the details, as the small print footnotes read “gross of fees,” which means returns one would have received without fees Bernstein charged; and other wording such as noting they are comparing “institutional services” to “advisor share classes” of other funds, including front-end-loaded A-shares.
I’ve written about the benchmarking game in Financial Planning Magazine. A request for the benchmark “net of fees” also went unanswered.
Without cooperation from AllianceBernstein, we are unlikely to know the overall performance after fees compared to broad index funds after fees. I suspect, however, that it would have issued a paper touting its active investing had it trounced the appropriate index funds after fees, and funds would be flowing into the firm at a much greater rate.
AllianceBernstein’s total assets grew from $450.4 billion at the end of 2013 to $467.4 billion at the end of 2015. This total growth of 3.8% would have been only 3.1% without an acquisition.
By comparison, the Vanguard Group assets grew from $2.677 trillion to $3.358 trillion, or 25.4%. Even Vanguard active assets grew from $896 billion to $1.001 trillion, or 11.7%. In fact, Vanguard issued a paper in 2013 showing its active funds have outperformed its index funds.
Worse Than Marxism
I’m no Karl Marx scholar, but I did research to see if workers performing below quota were rewarded. I found no such literature to cite. But to me, the position AllianceBernstein appears to be taking is that public policy should reward below-market performance. I couldn’t disagree more, and suspect even Karl Marx would disagree.
Fret not, AllianceBernstein, as active investing is alive and well, and there’s no cause to worry about its demise. As another Bernstein (William Bernstein) puts it, all that is needed to keep markets efficient are two dentists having lunch in Lubbock.
That’s a bit of an exaggeration, of course, yet I’m sleeping well knowing that Vanguard added more than $100 billion in active assets over that same two-year period, and now has over $1 trillion actively managed. Market efficiency is not at risk, and no rewards for poor performance are needed at this time.
At the time of writing, the author held no positions in the securities mentioned. Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine.