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Build It and They Will Buy It

Date : 14/04/2009

Author:  Babu Mathews

If 2008 was the sorriest year for active management & 2009 is proving to be spoilt as well, wouldn’t it be better off for Fund Management houses to begin their allocations to passive management vehicles?

Mutual Fund houses favor active management over passive strategy ‘cause they believe that the mortals running the funds will be able to generate alpha (and higher fees). Some of the Fund managers are really good at this; the other 75% are not. But in a catastrophic year for markets, where is the alpha? Where is the manager skill, to circumvent the worst of the equity markets? Clients end up paying the “Alpha manager fees” for generating non-alpha returns. If the same was invested in an index strategy, the fees would be cut down to 1/3. Over a period of time, one can safely say that an Index strategy would outperform active management. That’s a mathematical fact.

So where do we go to look at beta products? In this region it becomes very easy to answer ‘coz there are none. There are no Fund houses offering beta products. I have come across 2 fund houses offering Index funds with fees embedded in them similar to actively managed vehicles.

Now we are back to square one> “I need an investment product for my clients to gain exposure to capital markets, paying lesser fees, eliminate manager risk, provide greater transparency, diversification & liquidity, and finally derive pure unadulterated beta.”
 
Will the Fund house courageous to build a better product please stand up? And in the process expand investor’s interest & pave the way for creating an efficient capital market.

Educate me.
 
  
Fun fact:
ETF – Exchange Traded Products are great beta skimming tools that have low costs, diversification, and approval from Mom and Dad.


  • At the end of 2008 the Global ETF industry had 1,590 ETFs with 2,658 listings, assets of $711.0 billion, from 85 providers on 42 exchanges around the world.
-Barclays ETF Industry Preview
 
  • Just about the only product to see net inflows in 2008 were ETFs. On a global basis ETF net sales were US$ 187.5 billion while net sales of mutual funds were minus US$ 256.7 billion through the end of October according to Strategic Insight.
-Barclays ETF Industry Preview

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