The world is out to get active money managers. As Bloomberg’s Charles Stein reports, they’ve been having a tough economic recovery, with only 21 percent of stock-picking mutual funds beating their benchmarks during the past five years.
Managers say they haven’t changed, the market has. The easy-money climate of near-zero interest rates engineered by the Federal Reserve has artificially inflated prices of lower-quality U.S. stocks, they say, punishing those who focus on businesses with the best fundamentals.
This Fed thing is temporary. There will surely be multiyear stretches in the near future when the stock pickers as a group beat the indexes.
Even if the Fed probably won’t be making stock pickers’ lives miserable for much longer, there are other tormentors lined up and waiting. Some of them are at the White House, which issued a fact sheet recently on “Strengthening Retirement Security by Cracking Down on Backdoor Payments and Hidden Fees.”
And a few Metro stops away, the U.S. Supreme Court was hearing oral arguments in a case that could put added pressure on corporations to throw expensive, actively managed funds out of 401(k) retirement plans and replace them with passive index funds.
The issue is that running an actively managed mutual fund invariably costs more than just buying the stocks in an index and holding onto them. Some active managers will outsmart that index and some won’t, but it’s hard to tell ahead of time who’s who. When you factor in the cost difference, then, active funds will reliably generate lower returns for nonclairvoyant investors than index funds do.
The new model is the government’s Thrift Savings Plan, which offers four index funds and a Treasury bond fund, plus a series of life-cycle funds that move money around among the first five funds.
While it was once believed that the rise of index investing would make markets less efficient and thus create new opportunities for active money managers, the new thinking is that perhaps the opposite is true.
The result is an arms race, in which active managers put more and more resources into beating their peers but find that their relative position hasn’t improved at all.
That’s the theory, at least. It probably isn’t quite as dire as all that. But on the whole, yes, active money managers: the world is out to get you. •
