Voting with their Feet and their Dollars

I have regularly challenged advisors to justify their use of active management. 

It seems to me that anyone in the active management business ought to be able to defend the process of active management with more than a sales pitch — y’know, with data and stuff.

Examples of my challenges and related posts are listed below.

• The Active Management Challenge
• More on the Active Management Challenge
• The Charley Ellis Challenge
• Value is Elusive
• The Value Project
• The Best of Both Worlds: Active and Passive Investing

Sadly, the challenge remains largely unmet by the investment world as a whole. However, since I favor active management for a variety of investment types and styles, The Value Project — linked above — provides my response to this challenge.

It is therefore probably not coincidental that one of every three dollars invested in mutual funds and exchange-traded funds through the first four months of the 2012 has gone to Vanguard, according to Morningstar Inc. (and as reported by Investment News).  Investment in Vanguard so far this year is roughly $65 billion, nearly four times more than the next closest mutual fund company – PIMCO.  In ETFs, year-to-date through the end of April, Vanguard had gathered $21.6 billion, while BlackRock’s iShares collected $13.3 billion and State Street added $7.2 billion. As always, Vanguard focuses on passively managed index funds and ETFs. 

It seems clear to me that many advisors are simply not meeting the challenge to active management offered by the likes of Vanguard and, as a consequence, consumers are voting with their feet (and their investment dollars).  Moreover, low fees matter, especially in a low return, low yield world.

Consumers have pretty clearly thrown down the gauntlet.  How will the active management business respond?  Will it respond?

Here’s hoping, but only time will tell.