Market Efficiency Doesn’t Matter

In a recent discussion on the Advisor Perspectives website (it was in response to an article I wrote on the performance of Third Avenue Management’s actively managed funds), someone commented: “I am, for the most part, a proponent of passive investing, especially in asset classes (such as domestic equity) where the great majority of active funds historically have underperformed the index. That being said, there appear to be asset classes and funds that do tend to outperform.”

This assertion reflects a widely held view that, while the efficiency of the market for asset classes such as U.S. large-cap stocks is so great that attempting to add value (or generate alpha) through individual stock selection and/or timing the market isn’t liable to produce positive results, active management is likely to add value in less informationally efficient markets. International small stocks and emerging market stocks are generally used as the poster children for inefficient markets.

Read the rest of the article on ETF.com.