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It feels like there are two dominant retail investment strategies:Many ordinary people do not want to think about their investments much, and modern finance has designed a product that is ideally suited for them. It is the index fund (or index exchange-traded fund), whose essential thesis is that thinking about investments is unnecessary and in fact bad, and you should just buy the market and save on costs.1. Buy and hold index funds, or
2. Actively trade individual stocks and, while you’re at it, maybe options or crypto.
Other people, though, do want to think about their investments, and they want to think about investments that are fun to think about: stocks (or options or crypto) that are volatile, stocks of companies that do fun or interesting or world-changing things, stocks of companies with charismatic and entertaining chief executive officers, meme stocks.
There is not much in between. In particular, the whole industry of active mutual fund management is built on the idea that, if you don’t want to manage your investments, you can pay someone else to do it for you. But that idea feels passé in 2023. These days, if you don’t want to manage your investments, the accepted approach is to pay someone else almost nothing to almost not manage them for you: An index fund will do almost no managing and charge almost no fees, and that is widely considered the optimal approach. And if you want to manage your investments, you want to manage your investments; you want to pick fun stocks, not hire a star mutual fund manager to do the stock picking for you.[1]
Where does that leave the active mutual fund managers? Bloomberg’s Silla Brush and Loukia Gyftopoulou report that things are bad for them:Cheery! What do you do about this? One approach is to get into some adjacent business that does not rely on stock-picking; Abrdn “cut the business into three parts: a mutual fund business, a wealth unit that also serves retail investors and a platform for financial advisers — a strategy that has yet to prove it’s working.”Across the $100 trillion asset-management industry, money managers have confronted a tectonic shift in investor appetite for cheaper, passive strategies over the past decade. Now they’re facing something even more dire: The unprecedented run of bull markets that buoyed their investments and masked life-threatening vulnerabilities may be a thing of the past.
About 90% of additional revenue taken in by money managers since 2006 is simply from rising markets, and not from any ability to attract new client money, according to Boston Consulting Group. Many senior executives and consultants now warn that it won’t take much to turn the industry's slow decline into a cliff-edge moment: One more bear market, and many of these firms will find themselves beyond repair. …
More than $600 billion of client cash has headed for the exits since 2018 from investment funds at T. Rowe, Franklin, Abrdn, Janus Henderson Group Plc and Invesco Ltd. That’s more than all the money overseen by Abrdn, one of the UK’s largest standalone asset managers. Take these five firms as a proxy for the vast middle of the industry, which, after hemorrhaging client cash for the past decade, is trying to justify itself in a world that’s no longer buying what it’s selling. …
“It’s a slow but surely declining trajectory,” said Markus Habbel, head of Bain & Co.’s global wealth- and asset-management practice. “There is a scenario for many of these players to survive for a few years while their assets and revenues decline until they die. This is the trend in the majority of the industry.”
The other approach is for active managers to get out of liquid easily indexed public markets and into something else. Abrdn has also “largely abandoned competing in large-cap equity funds, choosing instead to emphasize small-cap and emerging-market strategies.” And of course there is private credit:“Just buy all the stocks” is a cheap and easy investing strategy that is also endorsed by academic research, but “just make private loans to all the buyouts” sort of obviously doesn’t work. So there is room for investment selection, and fees, there.For many other firms, private markets — and, specifically, the private-credit craze — are now the latest perceived savior. Almost everyone, from small to giant stock-and-bond houses, is piling into the asset class, often for the first time. In the past year and a half, a surge in M&A in the space has been driven by such houses, including Franklin, that are eager to offer clients the increasingly popular strategies, which typically charge higher fees. Others have been poaching teams or announcing plans to enter the space.
“I think that’s a big driver for many of these firms — they look at their own financials and think about what’s going to keep us afloat over the next few years,” Amanda Nelson, principal at Casey Quirk asset-management consultancy at Deloitte, said in an interview.
Meanwhile at the Wall Street Journal, Hannah Miao reports that actually retail stock-picking works great:Some of this is about stock selection: Recent years have been good for the stocks that retail investors tend to like.Wall Street has long derided amateur investors as unsophisticated market participants, prone to buying high and selling low. But the typical individual investor’s long-term mindset and penchant for risk-taking has proved fruitful in the technology-driven market of the past decade, defying the “dumb money” caricature.
The average individual-investor stock portfolio has risen about 150% since the beginning of 2014, according to investment research firm Vanda Research, which began tracking the data nine years ago. That beats the S&P 500’s roughly 140% during the same period.But some of it is apparently behavioral: Individual investors can be more contrarian than professionals can.The typical small investor holds an outsize position in megacap tech companies. Apple, Tesla and Nvidia alone make up about 40% of the average individual’s stock portfolio, according to Vanda. Although big tech stocks plunged last year, those investments have dominated the market for most of the past decade and have helped fuel the S&P 500’s 10% advance this year.Crudely speaking, if index funds offer market performance, and retail investors on average outperform the market, then professional investors on average will underperform the market: “Over the past decade, about 86% of all large-cap U.S. equity funds have underperformed the S&P 500, according to S&P Dow Jones Indices.”One advantage small investors have over professionals: They don’t have to worry about reporting performance to clients. That helps some individuals feel comfortable riding out market downturns. …
Everyday investors are known to buy the dip, piling into markets during weak periods. Many jumped into stocks in March 2020 when the market plunged at the onset of the Covid-19 pandemic, and rode the high as shares rebounded.
This seems bad for the big asset managers? They are squeezed from both sides: There is the rise of indexing, but there’s also the pretty good performance of individual investors who pick their own stocks. For a long time now, one argument for active management has been along the lines of “sure index funds look good in a rising market, but wait until the market goes down; then people will see the value of active stock selection.” But in fact people have seen the value of owning a lot of Apple and Tesla, which they can just do on their own. The real argument for active management surely has to be something like “sure index funds and also individual stock trading look good in a market dominated by the biggest names, but wait until Tesla and Apple underperform and the way to make money is by buying stocks that retail investors have never heard of.” Which is a harder pitch.
Hi @Mike. Thanks for the help. Silly me for going by what it says on the M* portfolio page. And thanks to @yogibearbull for trying to explain.WABAC said:Hi @WABAC. I took a double-take when I read this so I had to look it up. I invested in LCR because it was very much like LCORX - in my mind.It should also be noted that LCR is about 50% equities, while LCORX is about 16% equities.
Just for clarification, per Portfolio Visualizer, both LCR and LCORX are about 53% equities. Their comparative performance since the start of Jan. 2020 is very close.
CAGR LCR=5.87 LCORX=5.67
StDev LCR=10.67 LCORX=10.68
Max DrawDown LCR= -12.94 LCORX= -12.91
Sharp Ratio LCR=0.44 LCORX= 0.42
The strategy and results of both funds seem to mirror each other. Yes, one uses stocks and the other uses sector ETF's to mimic the sectors of those individual stocks. At least that's the way I interpret it.
Hi @WABAC. I took a double-take when I read this so I had to look it up. I invested in LCR because it was very much like LCORX - in my mind.It should also be noted that LCR is about 50% equities, while LCORX is about 16% equities.
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