One of the hoariest clichés of investing is the money manager who hits singles and doubles rather than swinging for the fences and taking the risk of striking out. I can't begin to tell you how many portfolio managers have described their investment philosophies to us in those words.
But is there still room for these singles-hitting, benchmark-hugging, stylebox-constrained "closet indexers" in today's investment world? Two prominent industry observers are taking opposite sides of this argument.
This morning's Investment News cited Scott Burns of Morningstar as saying that low-cost active ETFs could prove the salvation of benchmark-driven managers whose relative returns are otherwise eroded by fees. "They need every basis point they can get," Burns said.
Taking the opposite view is Ben Phillips of Casey Quirk, who recently wrote that industry assets will increasingly concentrate among firms that can demonstrate one of four winning value propositions: high-return active management, cost-efficient indexing, asset allocation expertise or solutions-led distribution. There's no room in his brave new world for managers who charge active management fees for index-like returns. (Phillips's full report can be downloaded here.)
Our own experience tells us that long-only stylebox managers, while not yet an endangered species, are struggling. More and more are turning to alternative products or prepackaged solutions. In fact, it's not clear that the industry's shift in the 1990s and 2000s toward "institutional-style" investing, focused on relative rather than absolute returns, was ever a good fit for individual investors with real-world needs and goals.
Will today's new investment products provide better answers? Only time will tell, but at least the industry appears to be asking the right questions.