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Thursday, August 07, 2014

Rekenthaler Predicts a Bleak Future for Active Funds

News summary by MFWire's editors

Here's to all the mariners, and their albatrosses.

Morningstar columnist John Rekenthaler recently pondered the future of active management, and it's ominous.

How ominous? Consider the first line of his column:

Do active funds have a future?†To cut to the chase: apparently not much.

And it's pretty much downhill from there in his column.

To-whit, the redoubtable Rekenthaler argues that post-2008 investor romance with passive funds wasn't a one-night stand. He tallies in his column the net sales over the past 12 months for all '40 Act products, with 68 percent of them from the passive team and 32 precent from the active.

He sums it up in this way:

Active managers have become the periphery. As the slogan goes, there is core and then there is explore. Active management is no longer core.†

There is one bright spot, and that is international investing, where he writes that active managers still have an advantage and bring in new money. Target date funds generate some flows to active managers as well.

However, Rekenthaler writes, alternatives may be the only space left to active managers where they have no competition from passives, but even this space has its vulnerabilities:

It is true that the final area of active-management success, alternatives, is an outright victory for active management. Alternatives may be the new kids on the investment block, but they are decidedly old school in their marketing: active management, high fees, and the argument that investors get what they pay for. Except that they havenít. Over the past five years, the only alternatives category to post acceptable total returns has been long-short equity, at 8.1% annualized. Every other alternatives category has either gained less than 4% annually or lost money. So, its victory may prove Pyrrhic.

To read more, go to Mr. Rekenthaler's column here. Watch out for any low-flying sea birds.  

Edited by: Tommy Fernandez

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