Editor's Letter: October 2013

Editor's Letter: October 2013

Let's Active*

Like everyone else in the industry press, we’ve been approached by Capital Group letting us know they are on the offensive. The home of American Funds, the firm is making the case for active investment management after years of suffering net outflows ($243 billion since 2008), mostly at hands of low-cost, index-based options from shops like Vanguard and the ever-expanding universe of exchange traded funds.

“It has become apparent that there is only one voice out there, a voice contending that passive investing is more attractive. We need to challenge that assumption,” says Capital Group Chairman James Rothenberg.

Part one of the charm offensive: The firm released a report showing their American Funds have performed better than their respective indicies 67 percent of the time during every five-year period from 1933 to 2012, net of fees, and over 73 percent of the time over every 10 years. (The report makes it clear they are talking about their funds, not active management in general, which they admit on average cannot beat the broader market; but just because the average person can’t dunk a basketball, the report states, doesn’t mean no one can dunk a basketball.)

Part two: The company announced they were upping their sales force from 115 people to 145 people, and bulking up those that will be dedicated to institutional and fee-based advisory businesses. American Funds distribution reps will take a “more consultative” approach to advisors in order to understand them better and, presumably, help them build their business. The firm also promised to be more transparent in how its funds are put together. We will finally be able to meet these managers.

It’s ironic that Capital Group’s initiative comes during the same month that the index fund celebrated its 40th anniversary. That was the year in which Rex Sinquefield, then an investment officer at American National Bank Chicago, offered institutional investors what is arguably among the first true index-based investment funds, the Standard and Poor’s Composite Index Fund, just before John Bogle unveiled his retail option. Index-based investing is now by far the most popular strategy employed by investors. Sinquefield went on to co-found Dimensional Fund Advisors.

The data makes a compelling case for American funds, but for investors, the active-versus-passive debate often throws off more heat than light. The research assumes an investor does nothing but lock money away in either option. It also fails to question the assumption that the indices themselves are not fallible constructions. So what is a better approach? “As economic research has shown, asset class allocation is the most important factor in determining a portfolio’s expected return level,” according to Jay Franklin and Mark Hebner at Index Fund Advisors, well-known index-fund aficionados. For instance, take growth funds. Investment advisory fim Gerstein Fisher found that over a 15-year stretch, 85 percent of large-cap growth funds beat the Russell 1000 Growth Index, net of fees. There is no doubt that American Funds are an excellent choice for many investors, and that good active managers (like those at American Funds) have enough flexibility and options to adjust their holdings quickly, and that can help them eke out an edge. The trouble is that there is no guarantee the manager will do that in the future. Picking the right horse may be a good, educated, odds-on bet, but it’s still a bet. Despite American Funds’ solid record, the smaller investor, and the safer institutional investor, is likely to continue simply buying the market at the lowest cost possible.

A word about the list that graces our cover; Registered Rep., now REP. magazine, has been a leader in putting together lists of brokers at the wirehouses and in the independent space for a long time. Unlike many of our competitors, we are as transparent as possible about our criteria and methodology. In the consumer space, rankings of financial advisors are sometimes little more than advertisements, a pay-for-play placement; that will never happen here. Some of the bigger names use a methodology that is so obtuse as to be meaningless. We rank advisors purely on the criteria that matters most for those who want to know who controls the largest amount of client money: assets under management.

In this month’s list, no Wells Fargo Advisors rep made the cut of the top 100 wirehouse advisors. Why? We were only looking at assets custodied at the firm. That knocked off a few Wells Fargo reps that were on the list last year, when we counted advised assets—such as retirement plans—as part of the that firm’s advisors’ total. On this, or any other matter, we welcome your feedback, criticisms, suggestions and questions. Email me at [email protected]

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David Armstrong



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