The following is in response to our article two weeks ago, The New Ptolemains, by C. Thomas Howard.

I have to admit, C. Thomas Howard is right. In response to my Advisor Perspectives article (When Will Objectivity Enter the Active v. Passive Debate) he introduces many rational critiques of my article that anyone who is objective would have to acknowledge. Like me, he questions “why market cap and PE” (although I think most of the academic work is based on book to market, not PE) should, or should not be used to categorize funds.

He is also right that defenders of geocentric theory (the earth being the center of the universe) invented convoluted calculations in attempts to defend their treasured theory in the face of the mounting evidence Copernicus had that proved otherwise.

I share with Howard (and have written in many of my papers) the notion that all of this slicing and dicing of the markets into style and market cap boxes is not really creating new asset classes and is just manufacturing non-diversified pieces of markets and thus it is worthy of skepticism.  Forcing managers to stick to a style box wasn’t something of my creation, yet there are many, many funds that self select themselves into one of those style boxes by choice, often to get a better "peer" ranking. That is why in www.fundgrades.com, we permit the user to grade their funds against any of 31 sub asset classes (including 13 domestic equity classes, not 31 - Howard’s minor error).

Howard is right about one more point. If I take all 5,745 of the domestic equity funds from my original response to Howard’s criticism of Wermers (those funds that had some semblance of matching any one of THIRTEEN domestic equity classes and sub classes) 60.15% of them BEAT THE S&P500 in the first three years of the six year period, and 58.91% beat the S&P500 over the entire six year period. Howard is right! Most domestic equity funds beat the S&P500! Therefore, skill is the cause and managers are getting more skillful, as Howard's original response to Wermers stated. I thank Howard for helping me see the errors of my ways.

Display article as PDF for printing.

Would you like to send this article to a friend?