Private Assets Need Public Buyers

The basic situation in asset management is that the alternatives managers have the products and the traditional managers have the customers. For a long time, the way normal people invested was through mutual funds run by traditional asset managers like T. Rowe Price or Fidelity. These managers run active mutual funds, charge fees on the order of tens of basis points, and have accumulated hundreds of billions of dollars of customer assets. And they have good distribution: They have relationships with investment advisers, who put their clients in the managers’ funds; they have good brand names and advertising; they run funds for 401(k) retirement plans.

But these days that business is pretty tough. Actively managed mutual funds are not especially popular. If you are a normal retail investor and you want to invest in the stock market, you might buy an index fund: Index funds charge fees on the order of single basis points, and most active mutual funds do not reliably beat the index, so it has become conventional wisdom that index funds are the correct way to invest. Or you might buy individual stocks, because that is more personally entertaining than entrusting your money to a mutual fund manager. But active funds are a little passé, and we have been discussing their “slow but surely declining trajectory” for years.