An Argument Against Passive Investing

As clients move dollars to passively managed funds, investment management firm Grantham Mayo van Otterloo has “remained bearish as markets have lifted valuations,” according to an article in Barron’s. But James Montier, a member of the firm’s asset-allocation committee who was interviewed for the article, “often challenges the assumptions of his boss [Jeremy Grantham] and others around him.”

Following are some of Montier’s comments from the interview:

  • Passive investing: “You cannot describe yourself as an investor if you are going passive. You are welcome to call yourself a speculator, but you honestly can’t say you care about expected returns if you are going passive at this time.”
  • Warren Buffett’s view that equities look cheap relative to interest rates: “This is an unvaluelike statement, and I don’t think it’s true. There are plenty of reasons why interest rates are not related to performance—very low rates haven’t stopped a 50% decline in Japan. So, I’m sticking to dead heroes now—Ben Graham and John Maynard Keynes.”
  • Secular stagnation: “Secular stagnation is a function of the policies that we’ve chosen to pursue.” He mentions the corporate push for shareholder value maximization, abandonment of full employment as a policy objective, globalization and deregulation as contributors.
  • How to build a portfolio in the current environment: “You stop trying to build so-called optimal portfolios, which are a very strong statement about your belief in the state of your knowledge—that your expected returns are going to be this, which to me is absurd.” Instead, says Montier, managers should build “robust portfolios that can survive lots of different outcomes.”