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Matt Morris explains the difficulties of active management in public markets
Key Takeaways
- In public markets, passive investing is often a better option than active management, as the vast majority of trading volume is now driven by passive and systematic strategies.
- Active managers can come with high fees and taxes, and the likelihood of underperformance makes it a difficult business to succeed in.
- Private market investing may offer greater opportunities for outperformance and be more tax efficient than public market investing.
Transcript
My name is Matt Morris. I'm the managing member of Hampton River Partners and the managing member of Dry Line Partners LLC and based here in Austin, Texas.
What's happened in public markets is you're in a situation where roughly 9% of trading volume now is fundamental investors, and then 91% is either passive systematic and quant. So if you're looking to invest in a fundamental manager for them to beat the market, it's a very high task. And for them to beat the market, they're probably just following whatever the other 91% of flows are doing. So it's largely a factor game, and they're basically just giving you beta, but you're paying more for it as a taxable investor. So on an after-tax basis, I would just go with the cheap beta and not worry about having to rotate in and out of managers and getting, you know, chewed up on taxes and fees over a long period of time.
As an individual, I think you're much better off just doing passive rather than trying to go after the hottest active manager because you're going to get chewed up on taxes, you’ll probably underperform, and he or she may not be around four or five years from now because the number of funds just closing down is so great. It's a very, very difficult business to make it in as an active manager.
So if you're not doing private market investing right now, you should have that as a meaningful part of your investment allocation for a number of different reasons. Number one, I think you have a greater chance of outperforming the market. Number two, it's more tax efficient. And as we head into probably what will look like a higher tax regime, after-tax returns are going to become of more importance to you and to your clients.
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