Rumors of the fading role of active asset fund managers may be greatly exaggerated. A number of asset management companies are growing precisely because they are offering wealth managers strategies that exchange traded funds can not.
To be sure, financial advisors don’t need another traditional long-only box style manager, who hugs the index. There are index funds and ETFs for that. Only about a third managed to beat their bogeys in the first half. So, it should surprise few that during the second week in July, most of the inflows were again attributed to SPDR S&P 500 Index ETF (SPY), which added $2.2 billion to its coffers, according to Lipper, a Thomson Reuters company.
ETFs are not the death of open end funds
But the growth of ETF does not equate the death of open-end funds. After all, 100 percent of index funds fail to beat their indexes because of fees.
“You don’t have to sell open-end mutual funds to advisors,” says Frank Wheeler, head of Nuveen’s mutual fund product team, “because Cogent research for Nuveen shows that 95 percent of advisors use open-end mutual funds in portfolio construction.”
Nuveen has seen steady inflows. One standout is the Santa Barbara Dividend Growth Fund (NSBAX), which has not only beat 97 percent of its peers during the last five years, but is also less volatile. The fund has attracted $960 million since the start of 2010. It garnered $215 million in the second quarter alone.
Wheeler tells eFinancialCareers that ETFs are a growth story (they now have $1.2 trillion in assets while open end equity funds have about $8 trillion) that has gotten a lot of ink. But, as far as penetration of advisor portfolios and percentage of the total assets under management, ETFs are still very small compared to the open-end mutual fund business. For instance, according to Cogent, wealth managers allocate 34 percent of client’s money to open-end mutual funds and just 9 percent to ETFs. The gap is even wider in the 401(k) space. San Francisco-based Callan Associates estimates that less than 3 percent of 401(k) plans offer ETFs as a direct investment choice.
“ETFs complement open-end funds. They don’t replace them,” says Wheeler.
Fresh opportunities for active managers
But ETFs do provide fresh opportunities for active managers. First, many active managers of diversified funds use them as a low-cost vehicle to provide exposure to certain segments of the market. They also use them as a hedging device. But they have also been a boon for managers who specialize in securities that are not represented in the index.
“We have seen the strongest inflows to funds that specialize in niche investing,” says J. Alan Reid, Jr., CEO and a founder of Forward Management, the investment advisor for the Forward Funds. He says the Forward International Real Estate Fund (KIRAX) has been especially attractive to wealth managers because it specializes in fast-growing foreign real estate companies that are not included in indexes. It is up more than 35 percent year to date.
T. Rowe Price Group Inc.’s (TROW) had net inflows of $4.7 billion in the second quarter despite weak markets. Some $2.8 billion of new flows went to target date funds, which cannot be replicated by index investing since they use other T. Rowe actively managed funds to adjust stock and bond allocations as the retirement date approaches.
In the world stock category, David Winters’ Wintergreen Fund (WGRNX) has grown from $1.5 billion to $1.6 billion this year despite the fact that it is down year-to-date, according to his spokesperson. He has a concentrated portfolio and took some large bets on Canadian energy that haven’t worked out so far. But his long-term record is enough to convince investors that he is worth their faith.
Delaware Value Fund (DDVAX), up 14.13 percent for the trailing three years as of July 25th, has enjoyed net inflows of $196 million so far this year. It is still noteworthy since the Russell 1000 Value Index is up 12.57 percent for the same period.
The managers of the fund pick stocks that are far more defensive than those in the index. “Those defensive names helped the fund hold up better than 96 percent of its peers in 2011's volatile market, with the fund's nearly 9 percent gain soaring past the Russell 1000 Value's 0.4 percent,” according to Morningstar analyst Katie Rushkewicz Reichart.
Putnam Investments has found a winner with the maverick 3-year-old Putnam Equity Spectrum, which instead of investing in just stocks, manager David Glancy invests across the capital spectrum, such as convertible securities and such.
“His approach has been popular with registered investment advisors, and it has positive flows this year,” says a spokesperson for the company.
That’s because Glancy’s investment strategy is unique and can’t be duplicated in a passive investment vehicle.