What if the mutual fund industry throws a party and no one comes?
We’re not talking about the Morningstar Investment Conference, which kicks off Wednesday.
That annual institution, now in its 25th year, will be well attended by portfolio managers, research analysts and financial advisors looking for that extra edge in deciding where to invest.
But is the public still buying the idea that all these professionals add value? There are signs of an erosion in investor confidence in actively managed investing.
An article published in Friday’s Wall Street Journal titled “An Old-School Stock Picker Struggles with Index Craze” notes that the veteran value investor Wally Weitz’s reward for beating the S&P 500 index by 1% on average the past 3 years has been a withdrawal of $400 million in investor funds.
It also notes the case of the legendary investor Bill Miller, whose Legg Mason fund beat the S&P 500 for 15 consecutive years before succumbing to the housing meltdown. Still, Miller reclaimed his glory last year with a “fund that soared 40% and beat its benchmark by a wider gap than any other U.S. stock fund with $50 million or more in assets,” the Journal reports. Yet “investors pulled $196 million out of it.”
And these are not mere anecdotes. The paper cites Morningstar research indicating investors withdrew $127 billion from actively managed funds while moving $70 billion into index funds and ETFs.
The subject certainly touches a nerve among professional investors. An article by the financial advisor Marshall Jaffe called “Will Indexing Kill the Market?” was among the most widely read articles on AdvisorOne in May.
Jaffe, citing research by NYU professor Jeffrey Wurgler, says that the more popular indexing becomes, the harder it is for active strategies to beat passive funds as the market bids up the values of index-component stocks.