Everyone is jumping on the ETF bandwagon as $63.6 billion flowed into the product YTD versus $144 billion outflow from equity mutual funds. Fidelity launched six new ETFs with “smart beta” and large cap filling the headlines. For smart beta fans I recommend a smart piece from James Montier (click here) who makes the case that: Smart Beta = Dumb Beta + Smart Marketing. Now regarding large cap, it’s pretty obvious to me that Fidelity is more interested in the fees than their clients returns (a major problem with the ETF industry). It is a well-known fact that small cap and value explain most of the outperformance of many portfolios so restricting any product to only large cap is not in any investors’ best interest. If we are going to talk about clients’ best interest why doesn’t anyone cough up the truth? The dirty secret that every professional knows but is kept locked up. It’s simple really: funds are too big to perform. The majority of funds are closet indexers and from a game theory perspective it makes sense. Why risk deviating from the index and losing AUM? It’s a game of fees. It’s not fair to average all the large funds and closet indexers with the real active managers and declare passive as the winner. Cohen and Polk in their 2010 paper (click here) prove that active managers’ best ideas outperform the market and that overdiversification dilutes their stock picking. So rather than going passive, the industry should move towards smaller funds. But then the fees would be less and who wants that?
At the end of September, Tim du Toit of quant-investing.com and I hosted a Value Investor Conference in Cyprus. It was a huge success as a high caliber group got together and bashed out ideas while enjoying the great weather and food. We were honored to have Bob Robotti share his many years of experience in a session that lasted for over an hour. I’ll be posting a video on the website for you to get taste. I’d like to thank everyone who attended, the speakers for their hard work and the CFA Society of Cyprus for supporting the event. See you next year!
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