FYI: FOR decades looking after other people’s money has been a lucrative business. Profit margins in the asset-management industry were 39% in 2014, according to BCG, a consultancy, compared with 8% in consumer goods and 20% in pharmaceuticals. The industry’s global profits in 2014 were an estimated $102 billion, allowing firms to pay those picking stocks in the American equity market an average salary of around $690,000 a year. Better yet, asset-management is growing fast: the industry looks after $78 trillion worldwide, and could shepherd over $100 trillion by 2020.
Yet the outlook for many asset managers is grim. The industry is being reshaped by low-cost competition. At the same time falling markets are shrinking assets under management, and thus fees levied as a percentage of those assets. Regulators, meanwhile, are trying to prevent consumers from being sold inappropriate products, which are often the most lucrative.
Regards,
Ted
http://www.economist.com/news/finance-and-economics/21695552-consumers-are-finally-revolting-against-outdated-industry-tide-turns?zid=300&ah=e7b9370e170850b88ef129fa625b13c4
Comments
In the referenced article, The Economist reports that the tide has finally turned in terms of active fund management. Active fund management is losing market share. It’s about time! It has been statistically established that professional money managers have been swimming naked for a long time.
Yes there are a few rare exceptions, but the bulk of the money management community have indeed generated excessive royal rewards for themselves, but not much for their customers, either individually or institutionally. It is common knowledge that passive Index investing has left these experts high and dry on the beach of under-delivered promises.
These experts promise excess returns (Alpha) over benchmarks and do not produce. In any given year 50% to 70% do not match their benchmarks; when the measurement timeframe expands to multiple years that underperformance increases to the 80% to 90% level. That’s true even in the Emerging markets sector where these guys are supposedly at an advantage. That’s a sad record.
It’s not that these experts have not had an opportunity to display their talents. Aggressive active investment organizations that were established to specifically service institutions (like company retirement funds) were assembled in the 1960s. According to some industry historians, these newly formed firms were motivated by the success of the Dreyfus Lion prowling out of the New York subway exit. Dreyfus was attracting tons of money.
In those days, individual investors did 90% of the trading activity; today, a few giant money management firms do 90% of that trading. At a minimum, these experts interact to cancel any of each other’s perceived investment insights and/or tactics. In fact, any such insights are more than neutralized by their operational cost drags.
Most money managers fail to satisfy their extravagant promises by not meeting their benchmark goals. Integrating globally, the active money managers who are on the negative side of the measurement criteria lose more on a percentage basis than those on the positive side of that balance sheet that incrementally gain against that same criteria. Now that’s a practical Loser’s game!!
So after these many decades, even the investing institutions, the preferred customers in terms of profit potential, are slowly learning the lesson that many private investors learned much earlier. The California pension fund, CALPERS, has finally reduced the number and the resource commitments to active fund managers. The shortfalls of active fund management has ultimately prompted even these moribund sleeping institutional giants into some action.
Good for them, good for their clients, not so good for the professional money managers. Their services do warrant some payoff, but their investment decisions have been a disaster. They have earned a pay-cut, and that’s now happening. We do learn, although far too slowly.
Best Wishes.
There are lots and lots of poorly run, small (and expensive) funds that I believe skew the "averages" (i.e. unweighted average fund performance). Maybe a modicum of diligence in avoiding the worst managed or highest expense won't bring the odds of success up to 50:50, but it surely will make the reported figures less bleak.
With respect to Dreyfus leading the way in aggressive investing (at least in advertising), that may well be true. But some of us haven't quite reached the level of your esteemed seniority, and recall Dreyfus differently. By the 80s, it was best known for Dreyfus Liquid Assets (MMF), selling primarily MMFs and to a lesser extend bond funds. Sure it still had (and still has) equity funds, but they were also rans. Interesting how people's impressions can differ so much.
Here's a NYTimes article describing this incarnation of Dreyfus:
Dreyfus Bets on the Lion Again, Januay 16, 1983.
For the classic Dreyfus comercial (which according to one site shows the J train subway exit on Wall Street - many different subway lines converge there):
"
Don't know if it actually brought in more business, but its been 40 years and I recall it clear as a bell.
I appreciate your perspective.
I'm an amateur investor and consequently have huge knowledge holes. I suppose you mean Money Market Funds with your mmf abbreviation. Or perhaps you mean Makes Money Fast. Either is appropriate.
I have zero direct experience dealing with Dreyfus. I learned of their early beginnings from Charles D. Ellis’s book titled “Capital”. I own that volume and dug it up to refresh my memory. Ellis discusses Dreyfus in Chapter 9 of that volume. He is the historian, not me, that I referenced in my earlier post.
Although I started investing in the 1950s, I was totally unaware of the existence of mutual funds in that timeframe. At one point, I foolishly believed that I could invest my paltry savings with George Soros. Dream On!
Best Wishes.
Don't fret the huge knowledge holes. After all, remember the Old Saw: ... or something like that.
Regards,
Ted
https://www.google.com/#q=we+make+money+the+old+fashioned+way+we+earn+it
I completely agree: “it's what you know for sure that just ain't so” that could do you major league harm.
In the 1950s I decided to invest in the stock market. Given my rookie status, I was absolutely sure that everyone knew more than I did. I put my trust and my money on investment tips that I received from false prophets like radio personalities and stock brokers. I couldn’t have been more wrong.
Do you remember the Walter Winchell Sunday night radio broadcasts? Do you even remember radio? Well, Winchell gave hot stock tips that eventually proved to be front-running, especially by his friends in Florida. I fell victim to that trap as well as many other hot tip disasters from brokers, who had incentives that did not include profits for me.
But I did slowly learn. The problem was that I learned all too slooooowly.
Best Wishes.
Regards,
Ted
Wow!! That's an impressive discovery in a short elapsed time. I'm definitely impressed, but not at all surprised. It's just another example of your research talent and commitment to MFO.
Many thanks for refreshing a rapidly fading memory. Winchell was certainly a controversial figure who finally lost the trust of his wide audiences. Too bad, but he earned his fall from grace.
Best Wishes.