VIEWPOINTS Map image courtesy of the University of Texas Libraries, The University of Texas of Austin. at University The Texas of Libraries, University the of courtesy image Map view. our in companies, operating of real businesses underlying the in interest ownership an than different fundamentally is fund index an owning and owns,” one what “knowing in believe we but thing, abad necessarily not is This replicate. to designed is instrument the etc.) that EAFE, 500, (S&P index particular the of return the reflects which of return the instrument, afinancial is owns actually investor the however, what practice, In index. the as weights same the in securities same the purchasing by index underlying an in holdings the replicating simply entails investing equity passive theory, In Management Defined Equity Active and Indexing funds. mutual index managed passively than lowervolatility with of time long over periods returns competitive deliver can and transparency, and control flexibility, of degree greater a offers professionals investment party third cost) by independent, (at reasonable managed stocks individual of high-quality, holdings core believe we clients, of our majority However, vast for the objectives. portfolio overall and needs client’s agiven achieving in useful be may each and merit, have approaches both Company, believe Trust we Houston At investing. equity to approach our behind reasoning the and approaches two these between differences the on touch briefly will we debate, the toresolve attempt an not is Viewpoints of this purpose the While resolved. fully be never may investing of equity context the in “indexing”) called (also management passive versus active between debate The ongoing Investing Approach to Equity Our

trading-oriented approaches. trading-oriented toexpensive, low low turnover cost, from strategies, of range awide includes management “Active” sectors. securities/industry overpriced avoiding while sectors securities/industry underpriced by overweighting returns excess positive toearn attempt will managers equity active long-only terms, simple In skill). manager’s tothe attributable is which benchmark appropriate of the excess in return value-added the (i.e. “alpha” amanager’s toas referred commonly is of outperformance The degree time. over benchmark, or index, underlying the tooutperform attempt an in inefficiencies market perceived toexploit seeks toindexing, contrast in management, equity Active OCTOBER 2015, ISSUE 2

1 Research & commentary Portfolio construction

Tax efficiency: A decisive advantage for index funds SUBSCRIBE

Get our research & commentary Advantages of Indexing December 26, 2013 E­mail address Low Cost Text size: A A A The low cost nature of passive equity managementKe is,y hini gourhli gview,hts a compelling benefi t that this style of equity SUBMIT Learn more investing has to off er. Management fees for passively managed investment vehicles can be found for less than 10 basis points, which is simply a level (in terms of fees)• "Ta xwhere cost" — tmosthe diffe activerence be managerstween the befo cannotre­tax retu compete.rn of a fund a Fornd its example, MORE RESEARCH & preliquidation after­tax return—is a way1 to gauge a fund's tax efficiency. the chart below, taken from the 2014 Investment Company Institute Fact Book , shows that the average actively COMMENTARY managed equity fund’s expense ratio is approximately• Van sevenguard a ntimesalysis fo uhighernd that, f othanr the 1 5the yea raverages ended O cindextober 31 equity, 2013, th efund’s median tax cost of domestic actively managed stock funds was 27 basis points higher than expense ratio: that of domestic index stock funds. Joe Davis on the markets and the FIGURE 5 6 economy • Some index funds can be tax­Investors,inefficient as w inell, ereturnspecially tforhose paying that seek veryto trac klow Expense Ratios of Actively Managed and Index Funds more narrowly focused benchfees,marks cansuch aexpects those in tothe earn mid­ a nad market-levelsmall­cap markets . Vanguard Tax­Exempt Bond Index Basis points, 2000–2013 VIEWPOINTS rate of return with market-level volatility. Fund With upper­income Americans facing tax increases as a result of legislation enacted at the beginning of 2013, it's no Let our research power your client  surprise that there's heightened interest in tax­efficient investing.  Activelymanagedequityfunds discussions  Broad­market index funds and their exchange­traded counterparts (ETFs) may be more tax­efficient than actively Tips for talking to clients: Market Activelymanagedbondfunds Tax Efficiency   managed funds. Just as some wayPassivelys of managin gmanaged investments aindexre more funds tax­effic ialsoent tha tendn othe rs, certain types of volatility investments are, by their nature, more tax efficient as well.  to have a low degree of turnover in the What makes one mutual fund moreunderlying tax­efficient tha holdingsn another? S ofom etheir releva nsecurities.t factors includ e a portfolio's management ALSO OF INTEREST  Indexequityfunds strategy, the turnover or trading strategy, the accounting methodology used, and the activity of the funds' investors.  This low turnover also leads to a greater Index funds and the myth of the "tax   "One w ay that a degreefund's tax eofffic taxiency effican b eciency, measure din is wgeneral,ith its 'tax coforst ,'" said Scott Donaldson of trap" Indexbondfunds Vangu ard Investment Strategy Group. "Tax cost refers to the before­tax return of a fund minus its passively managed funds when compared              p reliqu idation after­tax return. It represents a very high hurdle for active fund managers to overcome, in to the tax effi ciency of the average actively BROWSE TOPICS Note: Expense ratios are measured as asset-weighted averages. Data exclude mutual funds available as addition to their ongoing fund management expenses." investment choices in variable annuities and mutual funds that invest primarily in other mutual funds. managed fund. A recent Vanguard study Economy & markets Sources: Investment Company Institute and Lipper The illustration behelpslow sho tows aillustrate decisive tax athisdvan tpoint,age for in wherebydex funds: T he median tax cost for index funds (left side, green) was 73 basis points, whereas the median tax cost for actively managed funds they conclude that “The median tax cost Portfolio construction (right side, green) was 100 basis points. Thus, for the funds in the data set, the median tax cost of of domestic actively managed funds was 27 basis points higher than that of domestic index funds.”2 The chart In part, the downward trend in the average expense ratios of bothd indexomest iandc act activelyively man aged funds was 27 basis points higher than that of domestic index funds. The gap can be even ETFs below depicts this diff erence in observed tax effila r gciencyer: Note t hbetweene 277­basis ­activepoint diff erandenc e indexbetwee nfunds the wo rsfromt tax co s1998ts (sh o-w n2013: in blue) of domestic actively managed and managed funds reflects investors’ tendency to buy lower-cost funds Investor demand for index funds. Moreover, the chart shows a much narrower range in tax cost within the index category and that 75% of all Wealth management index funds is disproportionately concentrated in the very lowest-costindex fundsfunds h a Ind a2013, lowe forr ta x cost than that of the median actively managed fund. example,One point 66 percent to keep of index in mind equity fundis that assets not were held in funds with expense ratios that wereall “active”among the managers lowest 10 percent are alike.of all index Some equity funds This phenomenon is not unique toemploy index funds, high however turnover The proportion trading ofstrategies, assets in the lowest-cost actively managed funds isgenerating also high frequent realized short-term gains, while others might take a more tax-effi cient, buy-and-hold approach, generating infrequent tax bills and, generally, long-term capital gains. Some managers are “closet indexers” (charging a higher fee for index-like exposure), while others might construct highly concentrated portfolios. Some active managers charge higher fees, while some do not. Thus, it is important to consider the distinguishing features between diff erent active managers, as the term “active management” comes in many diff erent fl avors.

MUTUAL FUND EXPENSES AND FEES 91 Why index funds may have the upper hand

1 Investment Company Institute, “2014 Investment Company Fact Book 54th Edition,” www.icifactbook.org

2 The Vanguard Group, Inc., “Tax Efficiency: A Decisive Advantage for Index Funds,” December 26, 2013

2 Performance There is no denying the research that most active It is interesting to note that the performance equity managers fail to outperform their respective advantage tends to fluctuate, cyclically, between active benchmarks, net of fees, over rolling periods of time. and passive management. This cyclicality is most likely For example, a recent CNN Money article cited, driven by the overall market environment which tends “A staggering 86% of active large-cap fund managers to favor active equity managers in periods of low failed to beat their benchmarks in the last year… correlations within the broader equity market, and Nearly 89% of those fund managers underperformed vice versa for passive indexing. As the charts4 below their benchmarks over the past five years and 82% show, different time periods contain significantly did the same over the last decade.”3 Thus, as these different distributions of excess returns in the

VIEWPOINTS statistics suggest, it is quite difficult to pick a manager, large-cap active management universe: ex-ante, who will consistently outperform their respective benchmark over the long term.

3 Egan, Matt, “86% of Investment Managers Stunk in 2014,” CNN Money, March 12, 2015 4 Philips, Kinniry Jr. and Walker, “The Active-Passive Debate: Market Cyclicality and Leadership Volatility.” Vanguard Research, July 2014

3 Furthermore, a recent Vanguard study5 shows that even for the managers who outperform their benchmark over a period of 15 years, 97% underperformed their benchmark in at least 5 years with the majority underperforming forFigure a period 2. ofEven 6-8 successfulyears: funds experienced multiple periods of underperformance Figure 2. Even successful funds experienced multiple periods of underperformance Distribution of the 275 successful funds by total calendar years of underperformance, 1998–2012 Distribution30% of the 275 successful funds by total calendar years of underperformance, 1998–2012 30% 25 25 20 97% underperformed in 20 97% underperformedat least ve years in 15 at least ve years VIEWPOINTS 15 10 10

Percentage of successful funds successful of Percentage 5

Percentage of successful funds successful of Percentage 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 Number of individual calendar years of underperformance Number of individual calendar years of underperformance Note: Successful funds are those that survived for the 15 years and also outperformed their style benchmarks. The funds’ returns were measured against Note:the benchmarks Successful listed funds on are page those 3. that survived for the 15 years and also outperformed their style benchmarks. The funds’ returns were measured against Source:the benchmarks Vanguard listed calculations on page using3. data from Morningstar. Source: Vanguard calculations using data from Morningstar.

Constraints Using Active Management a manager can be found, this “forced” manager liquidated.5 Furthermore, only 18% of the initial 15 years through December 2012. We examined The efficient utilization of active equity management turnover creates added costs for the investor in the 1,540liquidated. funds5 Furthermore, both survived only the 18%full period of the and initial 15the years yearly through returns Decemberfor each fund 2012. and We aggregated examined can sometimes become constrained due to the form of higher portfolio turnover and, in turn, outperformed1,540 funds both their survived style benchmarks. the full period These and findings the yearlyresults, returns focusing for oneach two fund dimensions: and aggregated capacity, and investability, of a particular strategy. reduced tax efficiency. areoutperformed consistent theirwith styleprevious benchmarks. research—achieving These findings the results, focusing on two dimensions: Using small-cap managers as an example, the are consistent with previous6 research—achieving 1. The number of individual years of investmentoutperformance capacity is tough. (dollars under management) of Passive equity investing has many compelling outperformance is tough.6 1. The number of individual years of a particular manager is limited by the relatively small advantages,underperformance. as we have illustrated above. We are absolutelyunderperformance. open to utilizing low cost, tax-efficient index universePositive of excess liquid, readilyreturns tradable are inconsistent securities in the 2. The portion of funds that avoided having three Positive excess returns are inconsistent funds for our clients where it makes the most sense small-capAs our results universe confirmed of publicly that tradedsuccessful equities. active As 2. consecutiveThe portion ofyears funds of thatunderperformance. avoided having three relative to the readily available alternatives in the such,managers,As our it resultsis common although confirmed for rare, highly thathave skilled successful the potential managers active to in the consecutive years of underperformance. formWe found of active that management. almost all of the outperforming small-capsignificantlymanagers, space although enhance to “cap” rare, portfolio the have amount returns,the potential of weinvestor wanted to assets funds—267,We found that or almost97%—experienced all of the outperforming at least five intosignificantly theirbetter respective understand enhance investment theportfolio performance strategies. returns, ofwe This that wanted capacity individualfunds—267, calendar or 97%—experienced years in which they at least lagged five their constraint,winningto better 18%. understand in turn, Some creates investorsthe performance another assume set of that issuesthat if they for Advantagesstyleindividual benchmarks. calendar of yearsIn fact, in more which than they 60% lagged had their seven onearewinning ableto consider, 18%.to select Some particularly a talented investors inmanager, regardsassume ato that relatively forced if they Activeorstyle more benchmarks. Equityyears of underperformance.Management In fact, more than The60% results had seven are managersmoothare able stream toturnover. select of a excessUsing talented the returns manager,above awaits. example, a relatively assume depictedor more yearsin Figure of underperformance. 2 The results are ansmooth investor stream has allocatedof excess capital returns to awaits. a highly skilled In our experience, certain, which approaches shows the to distribution active equity of small-cap equity manager who in turn, has imposed managementoutperformingdepicted in Figure can funds be 2 accomplished, accordingwhich shows to intheir the a low numberdistribution cost, taxof of To test this assumption, we looked closely at the a cap on the small-cap strategy’s assets. The investor efficientindividualoutperforming years manner. funds of underperformance.Additionally, according toactive their numbermanagement of recordsTo test thisof those assumption, 275 funds we that looked both closely survived at theand now needs to find a new, highly skilled, small-cap canindividual incorporate years ofvolatility underperformance. reduction which can lead outperformedrecords of those their 275 style funds benchmark that both over survived the and equityoutperformed manager their with style larger benchmark capacity should over the the to superior risk-adjusted returns relative to the broad investor wish to add additional assets, or increase equity market. one’s allocation, to small-cap equities. Even if such

5 Wimmer, Chhabra, Wallick, “The Bumpy Road to Outperformance,” Vanguard Research, July, 2013 5 See Schlanger and Philips (2013) for an in-depth discussion of mutual fund survivorship and the poor performance of funds subsequently merged 4 5 orSee liquidated. Schlanger and Philips (2013) for an in-depth discussion of mutual fund survivorship and the poor performance of funds subsequently merged 6 Seeor liquidated. Philips et al. (2013). 6 See Philips et al. (2013).

4 4 Tax Efficiency Coupled With Low Turnover around a highly appreciated security, such as Exxon Active investing is not necessarily active trading. In today’s Mobil (ticker: XOM), using a relatively small amount day and age, where terms such as “high frequency of existing cash. Diversification could be achieved trading” are regularly discussed in the financial quite efficiently through a separately managed account media, it may be worthwhile to take a moment and by constructing the portfolio around the existing differentiate between active trading and active concentrated position. In this case, our equity investing. Active trading, as the term implies, can managers would exclude stocks from the energy result in high portfolio turnover, often recognizing sector, and energy-related businesses, when investing a large tax burden in the form of short-term capital the available cash. Alternatively, and using the same gains, thereby delivering potentially poor after-tax aforementioned scenario, if one simply purchased an index mutual fund which tracks the S&P 500, the

VIEWPOINTS returns to the investor. While there may be some trading strategies which generate respectable returns, already large energy weighting would become even despite the large turnover, we do not engage, or seek larger as the index fund would have close to an 8.50% to engage, in these types of strategies on behalf of our weighting to energy (based on 12/31/2014 S&P 500 clients due to the taxable nature of our trust accounts index sector weights). Furthermore, if the and the much lower odds of success for active trading. concentrated stock position is included in the index (as is the case in this example), one would essentially It should also be noted that many passive investment increase the already large exposure to the existing strategies are quite active on the trading side. As new security by purchasing the index mutual fund. As such, stocks enter and exit an index (i.e. termed index one might inadvertently increase the concentration, reconstitution), the passive index fund must adjust and hence, increase the overall risk, of the portfolio; the underlying portfolio of securities, accordingly, while simultaneously attempting to diversify and regardless of the fundamental merits of the new reduce the risk of the concentrated position. and exited positions.

Prudent and Disciplined Houston Trust Company takes a long-term approach Portfolio Management to equity investing, which is reflected in the low turnover and long holding period of the stocks owned The benefits of using active management are readily in our client portfolios. We, as well as the outside apparent when we look historically at some of the managers we work with, tend to view equity investing more recent “bubbles” that occurred in the U.S. as buying an ownership interest in real operating equity market. The chart below depicts the historical businesses. As a result, we generally do not sell sector weightings of the top three sectors which securities unless we believe there has been a material, comprise the S&P 500 index. When looking back in and generally permanent, change in the quality of the 2005 and 2006, just before the most recent financial business’ assets or a reduction in its competitive crisis which began in 2007-2008, the financial sector position within the market in which it operates. comprised over one-fifth of the entire S&P 500 index This long-term approach to equity investing makes the (spurred largely from the profits booked by many annual turnover of our client portfolios comparable to large financial institutions who participated in the the turnover experienced in many passively managed underwriting and market making activities of index funds, which in turn, provides favorable mortgage-backed securities and derivatives). after-tax growth in our clients’ assets. Similarly, at the peak of the internet bubble, often Active equity management in the form of individual referred to as the “tech wreck,” which occurred in the stock holdings also offers the opportunity to “build- late 1990’s to early 2000’s, we find that the technology around” low-basis, legacy positions in order to achieve sector made up nearly a third of the market increased diversification in the portfolio. For example, capitalization within the entire S&P 500 index. suppose a client wishes to build a diversified portfolio

5 FEATURE | SMART BETA

SMART BETA The Second Generation of Index Investing

By Vitali Kalesnik, PhD

n 1976, under the leadership of Jack Bogle, active management. The second generation mism, which prevailed during the dot-com Vanguard started a revolution in the asset of indexing seeks to earn long-term returns bubble, and fear, which abounded during Imanagement industry: It launched the on a par with highly skilled managers, and the global financial crisis. In such periods first index mutual fund. Other firms fol- to deliver those returns well below the costs it’s easy to see that the link between reason lowed suit, and in the final quarter of the of active management. and stock valuation is quite fragile. Table 1 20th century the idea of earning the market tracks the price evolution of a prominent return through low-cost indexing changed Cap Weighting in the Tech Bubble network provider during the tech bubble the way investors saw the world. ThisVIEWPOINTS was and the Global Financial Crisis and a major financial services company the first generation of index investing. First-generation index funds track capital- during the global financial crisis. ization-weighted indexes. The use of mar- In 2005, an article written by Rob Arnott, ket capitalization as the determinant of Cisco Systems was a star of the tech world at Jason Hsu, and Philip Moore started the sec- position size is both a blessing and a curse. the turn of the century. In 1999 Cisco was ond generation of indexing. “Fundamental The index allocates more to the larger overpriced and overweighted in the capital- Indexation,” published in the Financial stocks, resulting in high capacity and very ization-weighted index. In March 1999, its Analysts Journal, recognized that tradi- low implementation costs—this is the weight was 1.7 percent of the Russell 1000® tional indexes, with stocks weighted by blessing. But capitalization is a function of large-cap index while Cisco’s economic market capitalization, hold large positions price. If a stock were to become overpriced, footprint was only about 0.1 percent of the in high-priced stocks—undoubtedly itsDuring capitalization this also period would goin up, time, and so many U.S. technology economy.1 In the stocks coming year the sense, investing in a passive index is similar to including overpriced stocks—and smaller wouldwith its little weight to in noa cap-weighted revenue index. or earnings company were became trading even more at overpriced.following a momentum based strategy (i.e. owning positions in stocks that might be underval- Thisvery is richthe curse, valuations. because overweighting A case in pointCisco’s would price-to-earnings be Cisco (P/E) ratio wentmore of a security when its value rises, and vice-versa). ued. In the long run, they found, capitaliza- overpriced stocks and underweighting from an alarming 81.8 in 1999 to an absurd tion weighting leads to a return drag. underpricedSystems stocks(ticker: leads CSCO). to a return The drag. table181.9 below in 2000; breaks and as the out stock grew more Arnott et al. (2005) suggested an alternative Cisco Systems’ representation inoverpriced, the Russell its weight 1000 in the cap-weightedAt Houston Trust Company, we outsource the equity index design, where company weight is pro- Thereindex are relative periods when to itsstock P/E prices Ratio are andindex overall rose, likewise, economic from an alarming management of our client assets to independent, portional to the companies’ accounting propelled by investors’ emotions. These 1.7 percent in 1999 to an absurd 4.1 percent fundamentals, which do not depend upon emotionsimpact can on be the described economy as overopti (as- measuredin 2000. onInvestors the basissubsequently of temperedprofessional investment management firms who take current market values. several key accounting measures):6 a fundamental approach to security selection. Our Table 1: Two Stocks in Capitalization-Weighted Indexes equity managers take a deep dive into the research Fundamentals-weighted indexing leads to a long-term return advantage averaging his- Holding Data as of March 31 process of all stocks that are ultimately owned torically about 200 basis points per annum Tech Bubble 1999 2000 2001 2002 in the portfolios of our clients. As a result of this in the United States and more in the less- Cisco Systems prudent approach to equity investing, our developed markets. At the same time, Percent in Russell 1000® Index 1.7% 4.1% 1.1% 1.3% managers avoided the many companies which fundamentals-weighted indexes share Percent of Economy 0.1% 0.2% 0.3% 0.4% many desirable features with cap-weighted P/E Ratio 81.8 181.9 25.1 22.0 failed during the tech wreck, along with the Enrons indexes. For instance, they are transparent, Global Financial Crisis 2007 2008 2009 2010 and AIGs of the more recent past. By choosing to broadly representative, and, importantly, Barclays cost-effective. The objective of the first gen- Cisco Systems was one of many stocks in the invest in financially sound and growing businesses for Percent in FTSE UK 100 Index 3.1% 2.1% 0.8% 2.7% eration of index investing was to generate a technology sector trading at double digit to triple the long-term, our clients are better protected from Percent of Economy 2.8% 3.1% 3.1% 3.5% return equal to the before-fees return of the digit P/E ratios during this time period, best the risk of a permanent impairment in wealth once average active manager and deliver it to P/E Ratio 10.0 6.6 2.5 12.6 investors without the costs associated with characterizedSource: Research Affiliates by high investor euphoria within the these aforementioned bubbles inevitably “pop.” overall technology sector as a whole. JULY / AUGUST 2014 25 When underlying securities, such as Cisco Systems, Volatility Reduction © 2014 Investment Management Consultants Association Inc. Reprinted with permission. All rights reserved. become more overvalued, their representation in We evaluate our equity managers not only from a the index increases proportionately. As a result, return, but also from a risk standpoint. We believe capitalization-weighted indices, such as the S&P 500, that active management can incorporate important are prone to market bubbles and their corresponding risk reduction benefits into our clients’ portfolios. risk and return characteristics can become overly While our equity managers tend to build diversified influenced by overpriced securities, and the resulting portfolios of high-quality stocks for our clients, there sectors, which comprise the overall index. In this is a diminishing marginal return to the number of securities included in a portfolio.

6 Kalesnik, Vitali PhD, “The Second Generation of Index Investing,” Smart Beta, 2014

6 As the chart7 below illustrates, the benefits offered expected. This return, compounded over long periods by diversification begin to decrease dramatically once of time, will result in significant wealth creation or the number of stocks held in the portfolio reaches growth of the capital base. If the rate of return for the 10-20: asset class is treated as “given” (more or less), then aside from proper allocations to the asset class, the next most important thing is the control of what can be controlled; namely, the expenses related to management fees and capital gains taxes.

All of this would lead to the conclusion “why not index?” and we do not disagree. We are, however, able VIEWPOINTS to utilize good performing active management at a low cost, and with managers with whom we have long and significant relationships. Furthermore, active management promotes greater control in managing both the timing and magnitude of taxes incurred. We have also found that some active managers, over long This concept brings us to another important tenet of periods of time, produce alpha (excess return) with our investing philosophy, which is, what you don’t own a lower sensitivity to the movements in the broader in your portfolios is just as important as what you do own. equity market (beta). This is beneficial to long-term In an attempt to own the entire index, one may be at compounding of a portfolio, especially when cash is risk of “overly diversifying” a portfolio which achieves flowing in and out of the portfolio. Finally, there is the little in the way of risk reduction once the portfolio psychological preference for “knowing what one owns” contains over 10 to 20 different stocks. To reiterate a in the portfolio. previous point made in this paper, by choosing to own the index, one is making the active decision to own all So we incorporate both approaches to equity of the securities held in the index, without regard to management in our investment process. For smaller quality or future growth prospects. Active managers, accounts and allocations to specific market sectors by having the discretion and flexibility to build highly (like small cap value) we use indexing. For larger diversified portfolios using a fraction of the securities accounts with large embedded capital gains and contained in the index, can reduce the level of market (often) concentrated low-basis legacy positions, we risk in their portfolios relative to that of an index employ low cost, tax-efficient active management. fund. This reduction in volatility can, in turn, offer investors a higher level of compounding when the investor is taking regular, periodic distributions Conclusion from their portfolio. At Houston Trust Company, our objective for our clients and beneficiaries is to preserve their purchasing power over the very long term (often from one Our Approach to Equity Investing generation to the next). This requires growth of the At Houston Trust Company, we operate under certain capital base in real (inflation-adjusted) terms, and assumptions regarding equity management. The first among financial asset classes, equity investments are assumption is that, over time, equities offer the best the best means to achieve this. In pursuing this goal, real return, and that this return is going to be in the for the equity allocation, we do not believe there is a general range of the long-term historical return of “silver bullet” or a “one-size-fits-all” approach. Rather, 9.60% per annum.8 One may do better or worse, but we find both indexing and active management to offer returns of this order of magnitude are what can be their own respective advantages.

7 Less Is More: A Case for Concentrated Portfolios, Lazard Investment Focus, Lazard, February 12, 2015 8 Damodaran, Aswath, Stern NYU, “Annual Returns on Stock, T. Bonds and T. Bills: 1928 – Current,” January 5, 2015

7