By: Steve Smith
The flow, some would call it a stampede, of investor money from actively managed mutual funds into passive index based Exchange Traded Funds has been well-documented.Today’s investing advice will focus less on the why, and more on the implications of this shift.
The two main reasons cited are:
1) active managers have difficulty outperforming the market, or their benchmarks, for any extended time period.
2) over an extended period of time costs, in the form of trading or management fees, prove to be largest difference in overall returns.
The net result is a dramatic shift in money from active to passive.
But for active managers the rallying cry over the past few years has been, “it’s soon to become a stock pickers market!”
Meaning, if the bull market stalls, or if correlation diminishes, or heaven willing we enter a bear market, money will be shoved back into the hands of the humans that can make active and qualitative decisions.
But as this article in Bloomberg warns us, A Bear Market Might Be the Death Knell for Active Managers.
The main argument is we’re seeing a secular trend; already see mutual and hedge fund reduce fees, and recent periods of volatility or sell-offs are no longer catalysts for people to transfer money into the ‘smarter’ active funds.
Be careful what you wish for. While it is tempting for fund managers to root for a downturn so they can show investors why a human hand is better than the “dumb” passive index mutual funds and exchange-traded funds that investors have flocked to, it would actually be the worst possible situation for them, and likely result in a messy and hurried consolidation of the entire industry like nothing we’ve seen before.