According to a survey reported in the Financial Times and done at the newspaper’s request by Morningstar, assets in US index mutual funds now comprise a third of total domestic mutual fund assets. That’s up from 25% this time three years ago.
Nevertheless, actively managed assets under management have risen by 14%, despite the market share shift. So the fees being collected by active managers are up. This is doubtless due mostly to the fact that markets have been rising. The S&P 500 is up by about a third over the three-year span, the Bloomberg Treasury index by 12%. Watch out, though, if markets flatten or begin to decline.
More bad news: the FT is reporting that 90.2% of US active equity managers underperformed their benchmark, after deducting fees, over the twelve months ending June. Not numbers that will stem outflows.
Since I’m getting such an unbelievably late start today, I’ll only make two points:
–in the investment organizations I’m aware of, management control is in the hands of professional marketers, not professional investors. I think their giving a much higher priority to selling rather than making products is a substantial part of the underperformance problem for these firms. It’s highly unlikely, I think, that marketers will volunteer to step down and turn the reins over to makers. So I expect underperformance issues will continue. If I’m correct, the next bear market could prove crushing for these organizations, since the combination of falling prices and client withdrawals will doubtless mean sharp declines in profits. Where will the money come from to beef up research and portfolio management operations then?
–some large investment management firms known for active management are reported to be finally entering the index fund market themselves. First of all, this seems to me to show the marketing bent of their managements, giving support to my first point.
In addition, index funds have very large economy of scale effects and the oldest/largest have been in existence for decades. Because of this, I can’t imagine that Johnny-come-lately firms will ever have profitable index offerings. The firms may subsidize their index funds so that the fees for you and me will be on a par with bigger rivals’, but I don’t see how the subsidies can ever be taken away. Yes, such firms may retain assets, but their bottom lines will be worse off than if they retained them.