Redemptions Continue to Plague the Asset Management Industry

I was actually taken aback when I read this. About 80% of managers trail the indexes. The last time the industry has failed this poorly was in the late 90s, during the epic dot com melt up.

Over the past five years, as the market has risen to new record highs, investors have taken $422b out of actively managed funds and have contributed $480b to passively managed ETFs and indexes.

“Most active managers focus on companies, not macroeconomics,” said Michael Rosen, chief investment officer at Angeles Investment Advisors in Los Angeles, where he helps oversee $30 billion. “There has not been a lot of reward for making distinctions among stocks.”

In the year ended June 30, 85 percent of large-cap stock funds, 88 percent of mid-cap funds and 89 percent of small-cap funds failed to match the major stock indexes they track: S&P 500 Index, the S&P Midcap 400 Index and the S&P Smallcap 600 Index. The numbers for five and 10 years were slightly worse.

“The numbers are pretty appalling,” said Aye Soe, senior director of global research at the S&P unit that compiled the report. “Given the choppiness in the markets we would have expected the active managers to come out looking better.”

Mutual funds with an international tilt fared somewhat better. Over the past year, 75 percent of global funds, 55 percent of international funds and 42 percent of emerging market funds failed to match indexes. Over 10 years roughly 80 percent of the funds trailed indexes.

Active managers may take comfort by looking at the past. The last time they trailed indexes this badly was in the late 1990s. In 1998 and 1999, according to Morningstar numbers, fewer than 8 percent of large-cap domestic stock funds beat the S&P 500 over the trailing five years. When the tech bubble burst in 2000, stock pickers began to do better. By 2003, roughly half were beating the index over five years.

I dismiss the glib notion that all asset managers are fucking morons. I’ve worked with these people my entire life and most of them are smart, entrepreneurial people. I do think, however, that the inflexibility to hedge and/or take another position in the markets, other than 100% long all the time, has taken a toll. If you’re managing money for clients and want to protect client assets, in let’s say a retirement account, your only option is to move to bonds and/or cash, or maybe write some calls. Back in 2008-2009, I was able to position clients in a sundry of inverse ETFs, to hedge for downside risk in a deleterious tape, and it saved me. You can read the archives. It’s all there,  to the last trade. While most of my colleagues lost 30-60% of their assets, I made upwards of 60%.

Since then, the horrible lawyers at FINRA banned inverse ETFs from the industry, just because some idiots didn’t know how to use them.

Also, and I can speak to with first hand knowledge on the matter, having worked at a large mutual fund company at one point in my early career, much of the decision making is based off research reports and models that only assume the best. Rarely are these people modeling in volatility or draw downs of an onerous nature.

Essentially, investors are leaving actively managed funds because they’re woefully unprepared to deal with this new paradigm that is fueled by central bank over planning. It’s confusing and hard to adjust to. Having said that, people who can actually run money, and do it without incurring large draw-downs during periods of duress, are extremely valuable and in demand now. Throughout my career, my biggest detriment was working through volatility. My upside was massive when markets behaved well; but I often endured heart shattering losses during periods of fuckery.

This is precisely what I am seeking to remedy this year with my new, lower beta, method of management. I am unsure if I will stick to this model or adjust it as time goes on. I’ll find out by the end of 2016 and will be making a decision then.