Where are the Focused Active Managers?

Where are the Focused Active Managers?

December 8, 2014 Research Insights
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(Last Updated On: December 8, 2014)

We highlighted a few weeks ago that Smart Beta is More Expensive Than You Think.

Smart Beta and other closet-indexers are everywhere, but what happened to old-fashioned high-conviction active management in the mid/large cap space? Last I checked the market isn’t totally efficient and people are still not 100% rational. It seems that there should be some opportunities for those who are prepared to demonstrate some conviction. So who are these intrepid souls?

Data:

  • ETF: Our samples of ETFs are from ETF database. We sort our samples by categories, “U.S. Equity, Large-cap, mid-cap, value, growth, and blend”. After excluding “fund of funds” and missing data, our sample include  124 ETFs.
  • Mutual Fund: Samples of Mutual funds are from Morningstar Premium Fund Screener. We use the same sorting options as the ETFs and we get 6,133 samples (missing data excluded).

Key evidence:

Focused ETF funds (with stock holdings <=50) only accounts for 8% of the funds in the universe. This percentage is consistent with the finding in the article “SEC Denies Precidian Active ETF Request.” 

  • On average, most ETFs are lower-cost index trackers, and not actively managed.
2014-11-02 17_39_12-Microsoft Excel - ETF and Mutual funds ER
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

There is a higher percentage of mutual funds that are focused (about 23%) compared with ETFs. The average expensive ratio of focused mutual funds is 128 bps. The more “active” the fund–the higher the cost–on average.

2014-11-02 17_49_56-Microsoft Excel - ETF and Mutual funds ER
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

There seems to be a lack of focused ETFs, but a glut of expensive focused mutual funds. When will we see active ETFs finally take off? Maybe never?


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.