Before we get to today’s topic, let’s take a quick look at this morning’s initial report on second quarter Gross Domestic Product. The Commerce Department reported that 2Q GDP plunged by 32.9% (annual rate).
While the initial estimate of -32.9% was slightly better than the pre-report consensus of -35%, it was still the worst single quarter of economic weakness in US history. Today’s “advance” estimate will be revised two more times at the end of August and September.
Sharp contractions in consumer spending, exports, inventories, investment and spending by state and local governments all converged to bring down GDP. Gross Domestic Product is the combined tally of all goods and services produced during the period – which included the economic lockdown in March, April and May.
US equity markets opened sharply lower this morning after the GDP report was released – no surprise there. I’ll probably have more to say about today’s GDP report on Tuesday in Forecasts & Trends. Now let’s get on to today’s topic.
For the last two decades, there has been a significant trend away from actively managed mutual funds and more recently Exchange Traded Funds (ETFs) toward passively managed funds, which track a market index. Actively managed funds have a manager or management team which make stock selections based on fundamental and/or technical analysis.
Passively managed funds, also called “index funds,” do not require an active manager because they are designed to mimic a selected stock market index. Passively managed funds have significantly lower fees than actively managed funds. Passively managed funds typically have annual management fees of around 0.5% or lower, whereas most actively managed funds have fees around 1% or less.
With the stock market trending up, up and up since early 2009, investors have increasingly decided there is no reason to pay higher fees to active managers for picking individual stocks. Instead, just buy index funds and pay lower fees.
Again, this trend toward passively managed funds has been going on for the last 20 years or longer. But that seems to be changing this year. So far in 2020, the number of newly launched active ETFs has surpassed the number of new passive fund offerings for the first time. Still, there are over four times as many passive ETFs than active ones.
According to a recent Bloomberg report, so far this year there have been 68 active ETF offerings versus only 63 passive fund offerings. This is a first. The question is, WHY? I have some thoughts on this question I will share with you today.
The first and most obvious is the fact that US stock indexes plunged over 35% in late February and March, the quickest and steepest drop ever recorded. This unnerved many investors. A close second is the fact that the COVID-19 crisis has seriously undermined investor confidence that the bull market in equities will continue, for obvious reasons.
Third, market volatility has increased dramatically this year. These and other factors are making many investors uncomfortable having all their equity assets in a strategy that they know will, by definition, lose exactly what the market loses if we get into a bear market.
Thus, investors are increasingly moving some of their money from passive funds to active funds, most of which have the ability to switch more of their holdings to cash (money market) if they perceive that we are in a bear market or significant downward correction.
Actively managed funds have attracted more than $5.3 billion in both May and June, and another $2.5 billion so far in July – significantly outpacing inflows to passive funds over the same period — according to Bloomberg. That brings actively managed ETFs total assets to a record $122 billion.
At Halbert Wealth Management, we have long favored actively managed strategies over passive ones, generally speaking, simply because we prefer to have the ability to move partially or fully to cash if the manager decides the market environment has turned negative.
The problem for many investors is, however, they lack the knowledge to identify active managers which have demonstrated the ability to effectively move to cash during market downturns. Unfortunately, most active managers have not done this successfully, and it is admittedly difficult to find those who have. But they do exist.
This doesn’t stop investors from trying to find them, as is evidenced by the latest shift toward active money managers this year. We wish those investors luck in searching for successful active managers. But we remind them that’s precisely why many investors come to us.
If you are looking for active management strategies, or alternative investments to stocks or bonds, we can help you. Call us at 800-348-3601 and we’ll show you how.
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