O’Shaughnessy was best of Friday's session. An industry stand out. His presentation was about the inherent conflicted nature of delivering alpha and accumulating assets. Basically. the more AUM, the more holdings a portfolio must maintain, the more it then looks like an index, the less likely its performance will deviate from the index. "Scale eats returns." He sees active share as a measure of the potential to be better (or worse) than index. "Dare to be great." He thinks both Wes Gray and Meb Faber are offering ETFs closest to the strategies he recommends. That said, he admits there are only a few money managers he would trust with his money. (He would not say which ones.)
Met with Rich Powers, Vanguard's head of EtF product management. Vanguard offers 70 ETFs with AUM totalling $565B. As a whole, the US EtF industry offers some 1800 ETFs with about $2.4T AUM. So, with just 4% of products, Vanguard has captured one quarter of the AUM. Can you believe that? Our fund family data on the
MFO Premium site shows that 60 of their 70 ETFs have beaten their peers since inception. That's simply amazing. Rich had a quick response: "The power of low fees." Vanguard is the only company to offer some ETFs as simply another share class of its open-ended sibling. "Economies of scale," Rich explained.
Comments
If Leigh Walzer is right and we're only half way to passive options totally dominating the landscape, doesn't the quest for assets over alpha almost define eventual dissolution? It seems like a lot of these highly paid fund managers are eventually going to be out of work in a scenario like that and they're best chance of surviving would be to limit AUM and work as hard as possible to deliver alpha.
Do they believe it'll take long enough for Walzer's scenario to play out that they're best off milking their cash cow as long as they can and they'll still be able to retire rich even if there won't be much left for the next generation? Do they believe the idea that some have promoted and that I think you mentioned in another comment that the increased dominance of passive options will eventually lead to it's own disaster, so if they stay "closer" to the benchmark and minimize surprises they might still survive and collect fees all along? Do they believe Leigh and others are wrong? There are any number of other possibilities but even Leigh's comments this month about the stock prices of publicly held asset managers suggest the market has expectations about the future that aren't great.
It seems there are a handful of fund companies that have taken pretty aggressive steps to limit AUM, like Grandeur Peak and their hard closes, like Andrew Foster and Seafarer and like Vulcan Value who has written quarterly commentaries that recommend existing investors shouldn't add to their positions, at least in their small cap fund. I'm sure there are others but it seems like the investing public is still willing to support the thousands of funds that Dr. Snowball suggests could disappear without anyone being worse off... for now.
Here's link to Patrick O’Shaughnessy's Commentary page. He's a true student of the markets. And, here is link to the paper he briefed in Chicago Friday, Alpha or Assets?
Market cap index investing certainly making a lot of smart money managers look not so smart these past several years. Everyone would have been wise to simply invested in VFINX or VBINX back in 2009 and forgotten about it.
Value investors, which have all the academic findings to back-up the strategy's premium, have underperformed during this period. Hard to say exactly why. Some argue it's the cheap money that enables investors to chase growth stocks, which would otherwise be "unaffordable," if you will. Others argue since all assets have been "artificially inflated," again because of ZIRP, there has not been much distinction between value and growth ... everything is expensive!
It's interesting to think of the market cap index as the first quant fund. And, in fact, because it is market cap, it's actually a momentum strategy.
Yes, I'm skeptical of many money managers, fund families, and attendant fees. Published misuses of investors by firms like Edward Jones abound. Heck, look at what Wells Fargo did recently! I hate front loads, back loads, 12b-1 fees, and multiple share classes. I have made my dislike of American Funds known for all these reasons. Assets are sticky, so asset gathers abound.
All that said, I remember Peter Lynch once saying that just because an investment wins, does not mean it was for the right reason. And, just because it underperforms, does not mean it was for the wrong reason. I do think there are money managers and shops out there that are really trying to do the right kind of investing for all the right reasons.
I know David's mission for MFO is to help investors identify those very opportunities, especially when they are under-the-radar, like the individuals and firms you mentioned.
@MikeM2
I did not make it over to the Fidelity booth, unfortunately. But will keep eye out for Fidelity's new offering.