Where are the Focused Active Managers? by Wesley R. Gray, Ph.D., Alpha Architect,, Author, Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors
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?
- 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).
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.”
Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
- On average, most ETFs are lower-cost index trackers, and not actively managed.
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.
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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