The ‘No True Scotsman Fallacy’ and the active vs. passive debate in LGPS

July 16, 2014 Categories: Investment Strategy

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Imagine Hamish McDonald, a Scotsman, sitting down with his Glasgow Morning Herald and seeing an article about how the  “Brighton Sex Maniac Strikes Again”.

Hamish is shocked and declares: “No Scotsman would do such a thing”. The next day he sits down to read his Glasgow Morning Herald again, and this time finds an article about an Aberdeen man whose brutal actions make the Brighton sex maniac seem almost gentlemanly. This fact shows that Hamish was wrong in his opinion but is he going to admit this? Not likely. This time he says: “No true Scotsman would do such a thing”.

That story was first concocted by a British philosopher, Antony Flew, (the choice of crime was entirely his) as an illustration of what has become known as the ‘No True Scotsman’ fallacy. When faced with counterexample to a general claim, the ‘No True Scotsman” thinker just adds some non-specific condition so that his general claim can still stand, arbitrarily ruling out any counterexample as invalid. The fact that the counterexample might be the germ of an argument against the general claim doesn’t enter into it.

The active/passive debate currently ongoing in the Local Government Pension Scheme (LGPS) has the whiff of the ‘No True Scotsman’ about it. The general claim is that the LGPS has not benefitted from active management. This is an empirical fact, and it is unsurprising that this has been the average experience given the zero sum game that is active management. The government concludes from this that active management is in fact futile, and not worth paying for. A number of the regional funds within the LGPS have pointed out that in fact they have done very well out of active management indeed. But nonetheless the government has proposed that the LGPS take a wholly passive approach for listed equity assets, based largely on the argument that no true LGPS fund would want to pay for futile active management.

The trouble with this is that it removes one opportunity for the government to generate returns to fix the LGPS’s whopping deficit of £47 billion. And it does so without a proper investigation of the reasons behind the LGPS’ general failure to add value through active management.

I believe that failure is principally caused by failures in governance, not because active management is of itself a futile activity.  That’s the thrust of this response to the consultation on the matter on the matter – the government risks cutting off its nose to spite its face. And that’s something no true investor would want to do!

Sorca Kelly-Scholte – Managing Director, Client Strategies & Research, EMEA

Sorca Kelly-Scholte

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