The Fading Appeal of the Traditional Portfolio Manager

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Photograph by Getty Images

Is your portfolio manager a has-been?

According to a report from the Boston Consulting Group (BCG), about a quarter of the world’s traditional “active core” managers are seeing 5 percent or more of their assets drain away each year. Active managers still command $31 trillion in assets, half the world’s investments, but their share has plunged 24 percent in nine years.

Shareholders in those funds are leaving left and right for index funds and other low-cost passively managed options. Such investments have seen their share of the market almost double in four years. “The glory days for the standalone portfolio manager are really over,” says BCG partner Gary Shub.

The logic behind the shift will be familiar to anyone who’s listened to Vanguard founder John Bogle and other index fund enthusiasts. There is no evidence that active managers can beat index strategies consistently. Yet the expense ratio for actively managed equity funds is seven times that for index stock funds, according to the latest data from the Investment Company Institute (ICI).

You might think active managers would cut fees to keep customers. After all, such traditional managers generate fat 36 percent profit margins, according to BCG, so it's not as though it's a thin-margin business. And even low-cost index funds managed to drop the average expense ratio by 7 percent from 2011 to 2012. But the average expense ratio on an actively managed mutual fund in the U.S. didn’t budge in that period, ICI data show.

The reason active managers don’t lower fees to attract new business, Shub says, is because it would mean lowering fees for existing customers as well, which is a lot of revenue to give up. (Shub and his BCG partners, would, of course, be happy to help companies strategize about such challenges.) Instead, many companies that employ active managers are putting resources into faster-growing areas like alternative investments where investors might be more willing to pay for their expertise, he says -- which makes recruiting talented people to manage traditional active mutual funds increasingly difficult.

Thus, investors left behind in these fading funds may be doubly disadvantaged. Not only are they paying high fees, but the performance of their funds may suffer from a brain drain.

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