When the market values of GameStop, and AMC went up several hundred or thousand percent based on no change in their fundamental value, active fund managers did the obvious thing – they dumped them and moved on. But index funds, which tend to beat those active managers in the long run, held tight with “diamond hands” because they have to. In some cases they bought more at inflated valuations as their assets grew or as those companies issued shares to their now almost entirely retail base of owners. The only passive investor I’m aware of that was able to take the money and run was Dimensional Fund Advisors (I interviewed their deputy head of portfolio management, Mary Phillips, for the column). Even today, with their share prices (in my opinion) still grossly elevated, the main owners of the meme stocks are the self-described “apes,” many of whom believe there is still a short squeeze looming because of phantom shares.
Active fund managers shouldn’t look a gift primate in the mouth. The last year that funds benchmarked to the Morningstar Large Blend category outperformed that benchmark was in 2013 and before that it was 2009, according to a study by Hartford Funds. Index funds have strung together several consecutive winning years over their active counterparts during extended bull markets in the past, too—for example between 1994 and 1999.
This is one of those cases when owning an index fund can be frustrating. As of today, the top two holdings in the Russell 2000 Value Index – let me repeat, “value” – are AMC and Avis Budget Group, another company that recently got the meme treatment for discussing the addition of electric vehicles to its fleet. Whatever.
The hottest thing in investing these days is using ESG criteria (environmental, social, and governance). Count me a skeptic. Yes, I have seen studies showing that, for some specific period, such funds have outperformed the market. They usually are funds that have avoided fossil fuels during a particularly bad stretch for energy companies or are loaded up with tech stocks during a really good period.
Should you be forced to invest in a company that conflicts with your ethics? No, I guess not, but then investing in a fund isn’t the same as giving a company money. On the other hand, if you really want to put your money where your mouth (and wallet) is, why not make as much money as possible and then give it to a cause of your choice?
Let’s say that ethically and religiously focused funds, which reduce the number of possible companies in which you can invest, will do just as well over time as a fund that owns the whole stock market. The fees they charge you for doing that will still eat into your return, which is why ESG is a brilliant marketing concept but not such a smart way to invest.
But you know what really isn’t smart? I read today in the Wall Street Journal that Trump allies are now getting into the fund management business to promote “Unwoke” funds.Pictured up top is Kevin Hassett, the co-author of Dow 36,000. Just a reminder that this book came out almost 22 years ago and the Dow hasn’t hit that milestone yet, so caveat emptor. Below is the description of the criteria behind their “Society Defended ETF.”
Let’s just leave the gun control debate out of this and look at dollars and cents. If the companies, which I guess you could call anti-ESG, also do just as well as the market then you are paying unnecessary expenses to own the libs. At 0.75%, this fund charges you 0.7 percentage points more than a very low cost index fund. If the market goes up by 8% a year for the next 40 years then a $10,000 investment today would be worth nearly $50,000 less than in a plain vanilla fund. So if you love guns, or whales, or hate coal, or whatever, my recommendation is to just make the best investment possible and then get a nice tax-deduction at the end for contributing part of your windfall.
I sat down to speak with Doug Goldstein of the Money Tree Investing podcast to discuss whether it’s realistic to expect to beat the market with any consistency and the media’s role in spooking or exciting investors. He asked smart questions and I tried to give smart answers based on the findings in my book and other personal finance sources. Check it out!