Princeton economics professor Burton Malkiel, who started the first passive index fund for Vanguard in 1976, has experienced a “remarkable change of heart,” according to a recent article in the New York Times.
Referencing Malkiel’s revolutionary notion that dart-throwing monkeys could pick winning stocks as well as market “experts,” the article says the “index-fund evangelist” now believes, “Maybe the experts can beat the monkey after all. That is, if the experts are software engineers writing sophisticated algorithms for computer-generated trading.”
Malkiel, chief investment adviser for automated investment management firm Wealthfront, recently adopted a new approach they call Advanced Indexing. The article explains that the strategy “aims to exploit market inefficiencies and beat the passive approach based on an index weighted by stocks’ market capitalization, which Mr. Malkiel has long championed.” Such an approach falls under the category of “smart-beta” investing, which he has criticized for its high expense ratios. Wealthfront, says Malkiel, can deliver the approach at low cost and with tax efficiency. The change of heart followed his firm’s in-depth research of “decades of academic research into efficient markets,” according to the article.
This approach isn’t a sign that Malkiel no longer stands behind the idea of passive investing, however. The article quotes Jakub Jurek, vice president for research at Wealthfront: “To be absolutely clear, we’re not stock pickers,” adding, “At the same time, there are small adjustments you can make to improve after-tax returns.”
The article also presents views of critics such as Research Affiliates’ founder Rob Arnott (considered by many as a pioneer in the field of smart-beta), who questions the use of back-testing in developing such strategies. According to the article, Jurek agrees with the argument but clarifies that Wealthfront “relied on decades of peer-reviewed research to select factors that have stood the test of time.”