Dear Active Manager: Can I Reinvest?
When scale becomes a problem, even the greatest fund isn’t all that great.
There are two viable paths for money managers: 1) selling beta or 2) creating alpha. (For readers unaccustomed to investment jargon, that statement translates to "selling portfolios that move closely in line with the markets, or creating portfolios that perform both differently and well.")
Most successful active managers sell beta. This assertion defies convention, which places index funds in one group and actively run funds in the other, but the largest active funds are, in effect, cheap beta. They are bland, highly diversified offerings that act much like market portfolios, and are priced accordingly, carrying low expense ratios for their institutional shares. They can readily be substituted for index funds.
John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.