Asset Managers: The Tide Turns Hi Guys,
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.
Jason Zweig: Hold Your Nose And Buy Europe
Leave it to J. Wag. to nail it: "In any event, you need two factors for an international fund to beat the U.S. First, you need international markets to fare better than the U.S. Second, you need the dollar to fall against foreign currencies."
The last time both of those were running in the right direction for a U.S. investor was in the 'noughties, and it lasted long enough that even I realized it and made $ hand over fist in plain old VEURX and TRP's EM stock and bond funds:
https://research.stlouisfed.org/fred2/series/DTWEXM (set the time frame to "maximum")
No wonder that over the last 5y, currency-hedged FMIJX ranks in the top
1% of foreign large blend funds (that, and very little invested directly in EMs), but as good as the FMI guys are, it still trails the S&P 500 by a lot.