By: Carl Choy, CKW Financial Group
Active management today is much like yesterday. The hope is to outperform the benchmark, net of fees. Hoping clients will now understand all of the statistics and then buy something they don’t understand is hoping for too much. Or we as humans are just resisting change and fail to recognize technology is replacing high-cost, low-margin people. The ETF industry is here to stay. It is time to adapt and to stop doing things ETF’s already do. Single, large, mid, small with growth, value, sector, cap, or anywhere in between is already being done by an ETF. Each active manager believes its style, cap, factor, or factors beats passive over time. Active management is alive and well, however, security selection is being displaced by technology.
Morningstar ETF Managed Portfolio Landscape includes investment strategies that typically have more than 50% of the portfolio invested in ETFs. CKW’s Global Balanced Portfolio is part of the landscape. Why global balanced? Because 65/35 has been and still is hard to beat, net of fees. Maybe slicing and dicing 65/35 into many active pieces hoping each piece will give a bigger slice is hoping for too much. All students of finance and investing know that many things work to outperform the benchmark – but not all the time. Deciding the 5 W’s and 2 H’s (who, what, where, why, when, how and how much) in a portfolio is key to consistently outperform the benchmark. And the only way to outperform the benchmark is to be different from the benchmark or passive is better, net of fees.
ETF strategists are using passive vehicles to represent slices, or portions, of a benchmark and are actively changing what is different from the benchmark to hopefully outperform their benchmark, net of fees. Too many active slices increase interaction, which may reduce intended active factors or increase unintended consequences. Technology will continue to displace high cost to increase benefits to the end consumer. The strategists market is growing rapidly for this reason and others. Technology is disrupting the value of what is currently considered active management. CKW believes asset allocation can add incremental returns overtime, net of fees. Using passive, actively, lowers cost allowing the investor to keep more and allowing active strategists to lower cost to maintain margins due to fee compression. Technology will transform us to a new normal. On a daily basis, the U.S. stock market represents its constituent’s views of the winners and losers. Winners continue and losers fade away. The winners continue to solve problems and provide solutions to consumers willing to pay. So long as American-style Capitalism solves problems, the market will continue to represent the winners. The new normal in outperforming a benchmark, net of fees, will be about actively managing risks and not security selection.