The Indexing Revolution


01/04/2017

Investors of all types are voting with their money and dumping active managers of all kinds in favor of indexing at a rate not seen before. Whether it is 401k plans using life-style portfolios or major pension plans deciding to fire their long used managers and consultants, the trend is real and growing.

 

 

Significant secular trends are moving this process along:

Active Management has underperformed - in most asset classes and sectors Indexing has won the recent period vs. active managers.  Although these trends historically are cyclical, it is hard to argue with both lower cost and better performance.

Indexing offers more choices - With the advent of Active Beta, Low Volatility and Cap Weighted Indexing the lines have blurred a bit between active and passive. ETF's of every variety now represent passive investment choices and the offerings just keep coming.

Trends in regulation - The looming DOL regulation, while still not completely transparent, has created a heightened focus on costs as they relate to delivering a fiduciary standard.

While we recognize all of these over-arching issues, we are far from predicting the end of active management. We wonder, when have we ever seen "everyone" be right when it comes to investing? While there are few, if any, constants while investing, instead we are faced with cyclical changes which surprise most of us.

We believe whether the activity involves allocation, or security selection, clients who work with advisors generally expect more than a passive experience. While the current Bull Markets in Equities and Fixed Income may have masked client retention issues of a pure buy and hold experience, over time we believe a healthy mix of both active and passive has the potential to deliver all aspects of what most clients are looking for: a model combining a low cost market experience, ongoing risk mitigation and the potential for alpha in sideways and downward trending markets, positions indexing and active management within the same client experience. With UMA technology like FTJ FundChoice's MMS program, advisors are able to combine these diverse components within a targeted risk score.

This process has had appeal within our platform. Since the launch of MMS advisors who work with us have embraced the use of indexing within our Mandate One which is designed to provide the client Market Movement within the client portfolio. Mandate Two active strategies remain as popular as ever and in Mandate Three where all the strategies seek alpha, we are seeing record inflows.

Recognize and understand the trend. Don’t get caught with the herd. Provide legitimate options capturing the positive aspects of the movement while resisting overdoing it and getting “too much of a good thing.”

 

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Figure 2.1 Source: 2016 Investment Company Fact Book, 56th Edition, Page 47.

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. FTJ FundChoice does not guarantee any minimum level of investment performance or success of any index portfolio or investment strategy. Past performance is not indicative of future results.  Information obtained from third party sources are believed to be reliable but not guaranteed. FTJ FundChoice makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.