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In 2019, many active US equity strategies suffered from capital gains, underperformance and/or high fees.
As a result, investors are shifting to other vehicles, including ETFs—a trend we expect to continue.
The phrase “Ball doesn’t lie” is a basketball term, first uttered by former New York Knicks forward Rasheed Wallace. And in my view, it very much applies to today’s fund industry.
The ringer.com explains1 the meaning and usage of the “ball doesn’t lie” expression as,
“If a foul call is disputed by the guilty party, then the ball will have final say over whether the call was right or wrong. If the shooter misses one or both foul shots, then the ball has revealed that there must not have been a foul. If the shooter makes both shots, then there must have been a foul. The ball doesn’t lie.”
The Big Three Posting Up the Fund Industry
So how does this apply to the fund industry? Flows, in this case, are the ball. And based on the trend of assets moving from mutual funds to Exchange Traded Funds (ETFs) over the past decade, investors seem to prefer ETFs. Flows don’t lie.
While assets have grown by $1.9 trillion over the past decade for US large-, mid-, and-small-cap active equity mutual fund strategies, it has all been from market appreciation, as investors have redeemed $1.3 trillion over the last 10 years.2 Broad based underperformance trends are a common reason cited for the redemptions, but it’s not the only reason. Capital gain dividends3 and high fees round out the “big three”. However, unlike the “big three”4 that led the Boston Celtics to numerous titles in the 1980’s, this troika is leading to a shift in buying behavior to lower cost indexed-based vehicles, like ETFs.
Active US Equity Getting Dunked On By Poor Results…Again
Charging a high fee, underperforming a benchmark, or paying a capital gain are three reasons why an investor may be hesitant to either remain in a fund or even invest in the first place. But, for a fund to be guilty of all three at once, that is assuredly not a recipe for long-term success. Unfortunately, in 2019, there were quite a few active US equity strategies that had all three.