It’s been easy to argue against active management lately, too many funds to choose from, most of them underperform. In an environment where the S&P 500 has returned 15% annually over the past five years (double its historical average), it’s no surprise investors are fleeing active funds for passive ETFs. In that sense, investors are doing what they’ve always done – chase performance – that hasn’t changed.
You can bet your bottom dollar though, that broad market performance over the next five years will look nothing like the last five. Double digital annual returns for the overall market are not sustainable in a world were interest rates are increasing and cheap money policies are winding down. Thus, incorporating skilled active bets will likely again become important for investors’ portfolios.
What has changed irrevocably however, is investors’ sensitivity to the high fees and inefficient nature of the mutual fund or hedge fund vehicles they have historically used to access active bets. AlphaClone wants to solve these problems. By scoring managers using their SEC-mandated holdings disclosures and indexing their high conviction ideas, we seek to invent a new way for any investor to access skilled managers. Our investment philosophy is to give investors the benefits of both active and passive investing in one. Every active index we build reflects that.
A fresh new approach is not only desirable but absolutely necessary. Even when it’s the best of times for active management, the sheer number of funds available means that most have and will underperform over the long term. Consistently choosing skilled managers is near impossible for a vast majority of investors and even when you choose well, the fees and inefficiency sap most or all your benefits.
Active indexing can make a difference for most investors looking to incorporate skilled bets into their portfolios – they’re going to need it.
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