Management fees are easily judged. Given the riskiness of the assets being managed, did the realized rate of return exceed the rate on randomly selected portfolios of equal riskiness by an amount less than, equal to, or greater than the management fee? This simple measurement is enough unless there are nonpecuniary advantages or disadvantages attached to the management of one’s own investments.
Some investors are undoubtedly willing to pay someone in order to be relieved of the possible agony of managing one’s own investments, and others will require an extra margin of superiority for the investment advisor because the investor has been deprived of the fun of playing the investment game. Perhaps of greater importance are the political implications for some investors of the divestiture of direct responsibility for investments. Many corporations, for example, find that their dealings with labor unions are simplified if responsibility for managing the employee pension fund is in other hands, particularly large institutions of impeccable reputation.
there are many fine investment counselling firms, and their staffs are honorable, conscientious, and sophisticated. Yet, most of their resources are devoted to security analysis and to portfolio management rather than to investment counselling. Investment counselling is advising an investor regarding investment policy. Portfolio management is the execution of policy. Security analysis provides some of the information traditionally considered necessary for portfolio management.
Those who have found the evidence regarding the efficiency of markets convincing, as have the authors of this book, will believe that the most important investment decision—the one with the greatest impact on results—is the choice of policy with respect to risk. Rates of return of mutual funds, for example, vary consistently and substantially almost entirely because of differences in risk. There is no substan-tal evidence (some would say no evidence) that the managers of any mutual fund consistently display superior judgment in picking assets of a given degree of risk.