The 77-year-old Mr Ellis, who visited Australia last week to speak at the Vanguard financial adviser roadshow in Sydney, said there is a “wonderfully talented pool” of people participating in active management around the world.
“But they are so good at what they’re doing they’re making it awfully damn hard for any one of them to do better – particularly over a long period of time on a systematic basis,” he said.
A lot has changed since the 1950s when it was relatively easy to beat the market by 200, 300 or even 400 basis points, he said.
“Active management has been imperilled by a rising tide of wonderfully talented people. Fifty years ago there were not 100,000 people around the world who were actively competing in investment management,” said Mr Ellis.
In the 1950s chartered financial analysts (CFAs) barely existed, he said – but today there are 120,000 CFAs along with another 300,000 in the pipeline.
In addition, there are at least half a million people – including journalists, economists, analysts and portfolio managers – who are trying to eke out a small comparative advantage, said Mr Ellis.
“It’s a wonderful thing that they’re doing, and they’ve created the best market in the world – but it doesn’t mean we should all jump in and play,” he said.
It’s not that active investment isn’t ever worthwhile – “it just isn’t worth trying”, he said.
“It can be done, it is being done, it has been done and it will be done – but the odds are against it happening favourably to you. And the odds are against it happening favourably to your client,” said Mr Ellis.
To illustrate his point about the “cauldron of information” that now exists in investment markets, he pointed to Bloomberg terminals – of which there are now 300,000 around the world.
“There are people in New York who have three [Bloomberg] machines – one at work, one at home, and one in the limousine,” said Mr Ellis.
“Every time you want to buy any share you’re buying from a professional. Any time you want to sell any share, you’re selling to a professional,” he said.
“What are the chances that anyone is going to be able to develop the skillset that they can beat the competition over and over and over again?” asked Mr Ellis.
