Burton Malkiel: 'I Am Not a Big Fan of ESG Investing'

Episode Summary

Executive Summary: Burke Malkiel argued that retirees and investors face a low-return world that weakens the old 4% rule, favors higher savings/lower spending, and may require more equity, preferreds, and diversified bond substitutes. He endorsed indexing, low fees, and multi-factor or risk-parity ideas only cautiously, while criticizing ESG and high-cost annuities, and urging more international and emerging-markets exposure.

Main Topics: Retirement income in a low-yield world (Priority: 5/5): Malkiel says ultra-low bond yields make traditional retirement spending rules less reliable and force trade-offs among saving more, retiring later, spending less, or taking somewhat more risk. Revising asset allocation away from 60/40 (Priority: 5/5): He argues the classic 60/40 portfolio is too bond-heavy in a regime of 'financial repression' and that many investors should hold more equities and some bond substitutes instead of relying on low-yield bonds. Preferred stocks, dividend equities, and annuities as bond substitutes (Priority: 4/5): For the fixed-income portion, he suggests preferreds and some high-quality dividend-paying stocks can provide more income, while annuities may help retirees but often suffer from high commissions and fees. International and emerging-markets allocation (Priority: 4/5): He recommends more global diversification, especially emerging markets, because U.S., Europe, and Japan face demographic headwinds and because foreign markets appear more attractively valued. Indexing vs. active management and market concentration (Priority: 5/5): Malkiel defends indexing despite large-cap concentration in the S&P 500, saying active managers usually underperform and a total market index is preferable to a narrower benchmark. Factors, risk parity, and volatility management (Priority: 4/5): He is skeptical that factor tilts reliably generate excess return, but sees low-cost multi-factor funds as potentially useful for reducing volatility; he also warns risk parity could be hurt by inflation and rising bond yields. ESG skepticism and the rise of low-cost advice (Priority: 4/5): He questions ESG classifications and their return effects, and says the next major innovation will be inexpensive, software-driven investment advice with tax management and rebalancing.

Key Arguments: Low bond yields mean retirees may need to save more, spend less, or retire later because the classic 4% withdrawal rule is likely no longer sustainable. Preferred stocks and some high-quality dividend-paying stocks can serve as bond substitutes and produce roughly 5% yields, though they carry more risk than Treasuries. The traditional 60/40 portfolio is too conservative for the current environment; many investors should reduce fixed income exposure and increase equities or bond substitutes. Annuities can reduce longevity risk, but high commissions and expense ratios often make them poor value unless purchased carefully from low-cost providers. International diversification, especially toward emerging markets, is justified by better demographic trends and lower valuations relative to the U.S. Indexing remains superior to active management because active funds usually underperform over time, and a total stock market index is preferable to an S&P 500-only approach. Factor investing is not a dependable way to earn excess returns, but multi-factor strategies may modestly improve risk-adjusted returns by lowering volatility. Risk parity has historical support, but it could suffer badly if inflation returns and bond prices fall as yields rise. Indexing has not made markets less efficient; if anything, market pricing may be more efficient because trading is dominated by professionals rather than amateurs. ESG portfolios do not clearly deliver better returns or cleaner moral outcomes, and their holdings often include controversial large-cap names. The future of investing is likely in low-cost, automated advice rather than expensive human-managed portfolios. Investment decisions should be driven heavily by fees, because in low-return environments expenses consume an outsized share of expected returns.

Data Points: Safe bond yield: 10-year Treasury around 0.6% - Malkiel cites this as evidence that traditional fixed income offers little return. Negative-yielding sovereign bonds: More than half of sovereign bonds worldwide - Used to illustrate the severity of the low-return environment for retirees. Retirement spending rule: 4% rule may no longer work; consider 3% or less - He says retirees should rethink withdrawal rates in the current market. Preferred stock yield: About 5% - He cites diversified preferreds as bond substitutes for income-seeking investors. Dividend stock yield example: IBM yields over 5% - Used as an example of a high-quality common stock with income potential. Annuity fee impact: 100 basis points expense can equal a quarter of portfolio income if the portfolio yields 4% - Illustrates how fees materially reduce retirement income. S&P 500 top-10 concentration: About 27.5% of index weight - Described as unusually high concentration in the flagship U.S. index. Active fund underperformance: About 70% of active managers beat by the S&P 500 each year; about 90% underperform over 15 years - Cited via SPIVA-type data to support indexing. Indexing share of mutual fund assets: From 20% to 30% to 40% to over 50% - Malkiel says the growth of indexing has coincided with greater market efficiency and tougher active competition. BlackRock factor: Relative-performance compensation evaluation - He praises BlackRock for judging executive pay against peers, not just absolute stock gains. Multi-factor ETF expense ratio: Less than 10 basis points - He recommends low-cost multi-factor funds as the only sensible way to pursue factor exposure. Wealthfront fee: 25 basis points - He cites Wealthfront's low-cost automated advice model. Potential advisor fee: 1% to 3% - Used to show how traditional advice can consume a large share of expected returns. Goldman Sachs/Vanguard multi-factor note: Low-cost options mentioned - Examples of acceptable low-expense multi-factor implementations. CAPE predictive power: R-squared of 40% - He says CAPE is the best available long-term predictor of equity returns. Historic market returns since 1926: Stocks about 10% annually; bonds about 5% annually - Used to discuss equity risk premium and possible future returns. Risk premium implication: If unchanged, stocks may return only 5% to 6% going forward - Derived from high CAPE levels and lower expected returns. Japan demographic change: Population may fall by a third or more by 2050 - Used as part of the case for slower developed-market growth.

Pivotal Quotes: "There is no easy answer to this. I wish there were an easy answer that there's a riskless way to solve the problem, but there isn't." — Burke Malkiel: On the difficulty of retirement planning in a low-yield environment "The lower the expense that I pay to the purveyor of the investment product, the more there will be for me." — Burke Malkiel: His central investing mantra on fees and returns "I don't think there are particular times where active managers outperform." — Burke Malkiel: On the case for indexing versus active management

Implications: Listeners should expect lower future returns, greater importance of fees, and a stronger case for global diversification, indexing, and low-cost advice. Retirees may need more flexible spending and may have to accept some additional risk for income.