Photographers Need Accountantants and Financial Advisors

Photographers too need to take care of their accounting and finances

Here’s an article I put together with the help of Craig from CSB Group. This should help clear some questions you might have on the subject of finances, accounting and tax 🙁

Active fund administrators have been around for years, with financial advisors frequently recommending them to less savvy clients. However, in recent years’ passive funds have been developed, and a wide swath of research by finance professors’ claims that active fund administrators, as a group, do not beat the market.

This article shall list a few arguments for and against active fund administrators, along with describing a few findings from modern investment research.

Arguments in Support of Active Fund administrators

– According to Investment Week, recent M&G analysis shows that the top 10 active funds in the IMA UK All Companies hugely outperformed the FTSE All-share index, returning 117.7% on average compared with just 26.9% from the index.

– In emerging markets, the majority of the risk comes from geopolitical risk. Active fund administrators will be able to use their skills to move assets away from troubled countries.

– Small and Medium cap companies, as well as those from emerging market economies, receive less attention from analysts. It is therefore possible for skilled professionals to identify and profit from inefficiencies in these markets.

Arguments Against the Use of Active Fund administrators

– While some active fund administrators and asset management firms have historically beaten the market, this is due to luck. As a group, empirical evidence shows that active fund administrators underperform tracker funds, mainly due to the high fees that they charge. Just because a manager has outperformed the market in the past, does not mean that they will outperform the market in the future.

– The fees from active fund administrators are too high, and seriously hinder their changes of outperforming the market. Investors are therefore better off using tracker funds.

– A lot of the reported outperformance certain active investment styles can be attributed to passive factors that can easily be reproduced in a low cost, transparent and efficient fashion. The book “Active Beta Indices” provides a good discussion on this subject.

Other points of interest

Brazil is categorised as an emerging market, so this finding goes in line with the argument that active management is more suitable for emerging markets, as well as small and medium cap companies.

Along a similar line of argument, some analysts have stated that well covered markets such as the US and UK large cap markets will be efficient due to the number of people trading them, but that opportunities could be found in less covered areas. According to this line of thought, investors who wish to invest in large cap shares should invest in trackers, while those who wish to invest in smaller companies should choose actively managed funds.

Some large firms such as Merril Lynch and Goldman Sachs have conducted research into passively replicating the returns of active hedge funds. These use methods such as “factor-based replication” and “payoff distribution replication”, and can involve regressing hedge fund returns against factors such as the VIX volatility index and interest rate differentials.

There Is No Firm Answer

The debate between Active and Passive fund management is still alive and strong. Two of the biggest unanswered questions in this debate are:

– Do different markets have different levels of efficiency? The early arguments in favor of passive funds asserted that fund administrators fail to beat the market. But more recently, proponents of active management have stated that it is developed markets that are efficient, and that those with skill can still beat undeveloped markets.

– Can the returns from active funds be passively replicated? The studies from Merril Lynch and Goldman Sachs are publicly available for those who wish to peruse them, and in the coming years there will undoubtedly be new investable funds based on these indices.

In my personal experience, the equity indices are developed markets definitely contain areas of inefficiency, as I have managed to earn a living through speculating on the largest European equity index futures. However, what I do involves trading exceptionally short time frames, is non scalable, and therefore cannot be applied to the mass market. From this I believe that there could be small areas of inefficiency in any market.

Conclusion

There is no firm answer as to whether or not active managers outperform the market. There are papers that claim to show empirical evidence both for and against them. And even papers based on empirical evidence can be questioned, as statistics can be fiddled to support the author’s objectives.

An example of statistical curve fitting is the M&G analysis mentioned above. Based on a large sample of fund administrators, we would expect them to roughly track the market (minus their fees). After 10 years, roughly half would beat the market, and roughly half would underperform. The number of fund administrators that we’d expect to outperform the market would be a function of volatility, which would depend on the tracking error that active fund administrators are permitted in their mandates.

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