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The New Breed of Active Management

Lessons from last year’s sales champions.

John Rekenthaler, 01/20/2017

Changing of the Guard
Through the turn of the century, blue-blood stalwarts like Fidelity (founded 1946), American Funds (1931), and Putnam (1937) consistently dominated fund sales. At times, brokerage firms crashed the party by pushing their proprietary funds, but such incursions were short-lived, because the reputations of their funds quickly caught up with their performances. For the most part, the grande dames held sway.

All that began to change with the New Millennium, as relative newcomer Vanguard muscled into contention. The 2008 market crash accelerated the trend. Since then, the vast majority of traditional firms have faced steady redemptions. This has become Vanguard’s world, which we share only with Valley Forge’s permission. Passive funds dominate, but a few active managers have braved the sales headwind. Below are the five active fund managers who attracted the most net new assets in 2016.

(This list comes from Morningstar data, as requested by trade industry publication Ignites.)

1. Vanguard (Founded 1975, $183 Billion)
Rough justice indeed! The company that displaced active management also leads the current sales charts among active managers. That's not to say Vanguard’s actively run funds account for much of its inflows: For perspective, $257 billion went into the company’s passive funds. But every little bit counts.

Adding to the irony is the reason for Vanguard’s success: Its active funds look a whole lot like index funds: low-cost, low-turnover, and low-surprise. Its stock funds are typically diversified not only across hundreds of stocks, but also across multiple portfolio managers. Its bond funds are active in name but passive in mindset. They look much like their benchmarks and change only slowly.

Even Vanguard’s sector funds are conservatively run. Rival fund companies tout their sector-fund managers’ insights, the ability for professional managers to find what the rest of us cannot. Vanguard, in contrast, has been content with a simpler pledge: Its sector funds will behave as their industries do, reliably and consistently.

2. AQR (Founded 2009, $10 Billion)
Technically, Applied Quantitative Research began operations in 1998, but its first mutual fund arrived a decade later. The company’s name gives the first clue of how it differs from the industry’s founding fathers. AQR’s idea of active management is far removed from the traditional notion of the “prudent man” who carefully vets each portfolio holding. (The language, as with the origins of the fund industry, is exclusively male.) This firm invests by the numbers, as befits an organization co-founded by a trio that met during a finance Ph.D. program.

In a sense, AQR’s funds are active indexes. The company identifies strategies that it believes have investment merit--for example, the risk parity approach of allocating assets so each portfolio sector carries the same amount of risk, or the momentum tactic of buying stocks that have recently performed well. That work is clearly active. But when AQR implements those strategies, it doesn’t monkey around with security selection. It lets the numbers do the work. As such, the portfolio could fairly be called an index of the strategy.

is vice president of research for Morningstar.

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