The First Wave of Science

The first wave of scientific thinking: passive investment

The first wave of scientific thinking in the investment industry focused on the success, or otherwise, of the ‘craft’ model of investment management. Did managers in the craft tradition actually beat the general market? The answer is that on average they did not, and they do not. Studies generally find that the majority of funds managed in a traditional way under-perform the general market after fees; some do beat the market, but their superiority does not seem to persist from one period to the next, and overall no more managers outperform than one would expect by random chance (imagine a hundred people flipping coins: the fact that some people flip five heads in a row is the result of chance, not skill in flipping).

The first wave of scientific thinking gave rise to the ‘passive’ investment movement which argues that, rather than paying an investment manager, one might just as well track an ‘index’ (like the FTSE 100 index) and thereby enjoy lower costs and a much reduced chance of serious underperformance. Buckingham Street Capital offers multi-asset index tracking portfolios. These portfolios are likely to be suitable for clients who wish to control their costs, or who have a desire or requirement for simplicity in the management of their portfolios.

Next: The Second Wave of Science