Active Management: Back To The Stone Age?

August 21, 2009

The latest S&P scorecard is out. And our own research director, an ex-active manager, is mad as hell. Hear him roar!


Before I begin this rant, let me point out my bona fides.

I have worked at the largest index company in the world. I left that job to be an active manager, both personally and professionally.

And I failed. I have confessed my sins, done my penance and I will sin no more.

<flame on>

Yesterday saw the release of one of my favorite reports, the Standard & Poor’s Indices vs. Active Funds Scorecard (SPIVA). We covered it here on, as we always do. We cover it because it generally proves the point, as it has for half a decade, that active funds habitually under-perform the indexes they’re attempting to beat.

The evidence is so consistently overwhelming that the headline here was that one tiny sliver of the data—asset-weighted performance of a few slices over a few time frames—managed to break the monolithic historical data in which active has failed, test period after period, in virtually every asset class you can imagine.

With all of this talk about whether the U.S. Natural Gas Fund (NYSEArca: UNG) is a “sell,” or if commodities funds are going the way of the dodo, the real demons in the room are the active managers.

Despite the indexing revolution that started 40-odd years ago with the quaint idea of saving money and buying the market, active funds continue to pillage the accounts of the unwary.

Exhibit A: New Idea Using ETFs?

Consider if you will this delightful little filing for a new mutual fund to be actively run by Donald Hagan. As explained in the prospectus, filed with the optimistic date of Oct. 30, 2009, Mr. Hagan is a.k.a. Day Hagan Asset Management.

This little gem attempts to cash in on the dominance of ETFs by sticking ETF right in the name. But this lipstick-wearing pig is about as far from the goals of true index investors as you can imagine.

Let’s dig in.

The fund’s goal is, unsurprisingly, “long-term capital appreciation.” Because let’s face it: No fund is ever going to get SEC approval with a goal of “take as much money from investors as possible.”

It goes downhill from there. The fund will achieve this noble goal in the following manner:

“The Advisor typically selects ETFs for the Fund that invest across a broad range of global asset classes including, but not limited to, U.S. and international stocks, U.S. and international bonds, U.S. and international real estate, commodities and currencies.”

In other words, “anything we feel like.” The only thing missing is futures and options—except, of course, that when you get deep under the hood of the prospectus, it can invest in everything from Brady Bonds to REITs to Bulgarian wheat futures (no, there’s not actually any such thing as Bulgarian wheat futures; that’s called hyperbole).

For the privilege of letting someone else pick your ETFs, here’s the butcher’s bill.


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