Alpha dogs as talent shortage looms for stock portfolios

Long-only popularity slides; new managers gravitate toward hedge funds

Jul 10, 2013 @ 3:15 pm

By Jason Kephart

Things could get a lot worse before they get better for long-only equity mutual funds.

Beset by inconsistent performance and the growing popularity of indexing, the long-only stock funds have been shedding market share for years.

Active equity funds held $4.4 trillion, or 34% of mutual fund market share, at the end of last month, down from $4.7 trillion and 42% of the market share at the end of 2007, according to Lipper Inc.

“They still have a lot of assets, but in general, it's not a positive story,” said Brent Beardsley, a partner at the Boston Consulting Group, an asset management consultant.

To make matters worse, their dwindling popularity is making it harder for mutual fund companies to attract top talent, he said.

“The new talent isn't going to long-only stock funds. It's going into hedge funds,” Mr. Beardsley said.

“Mutual fund companies are not getting the talent they're used to,” he said. “It's hurting the ability to generate alpha.”

That is bad news for an industry that had a hard enough time generating alpha when stock mutual funds were cool.

From 1999 to 2003, for example, more than half of large-cap funds underperformed the S&P 500, according to Standard and Poor's.

From 2004 to 2008, less than 30% beat the index. Over the last five years, less than 25% outperformed.

Although increased correlation among stocks is a popular theory for why active managers have failed to beat their benchmarks, a study by The Vanguard Group Inc. found that there is plenty of opportunity to produce alpha in the market, lending credence to the theory of a talent drought.

More than half the stocks in the S&P 500, for example, finished with a return more than 10 percentage points different than the benchmark annually since 2000, according to Vanguard.

That is at least 250 opportunities to overweight stocks that will outperform or underweight stocks that underperform the benchmark index.

The average 1% or so fee that investors have to pay an actively managed fund doesn't help managers' performance either, but if there really is a talent problem, there might not be a fee small enough to push managers past their benchmark.


What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video


Top questions surrounding future of DOL fiduciary rule

Reporter Greg Iacurci and managing editor Christina Nelson discuss the biggest uncertainties springing from the Fifth Circuit Court of Appeals' decision to vacate the regulation.

Latest news & opinion

What the next market downturn means for small RIAs

Firms that have enjoyed AUM growth because of the runup in stocks may find it hard to adjust to declining revenues if the market suffers a major correction.

DOL fiduciary rule likely to live on despite appeals court loss

Future developments will hinge on whether the Labor Department continues the fight to remake the regulation its own way.

DOL fiduciary rule: Industry reacts to Fifth Circuit ruling

Groups on both sides of the fiduciary debate had plenty to say.

Fifth Circuit Court of Appeals vacates DOL fiduciary rule

In split decision, judges say agency exceeded authority.

UBS, after dumping the broker protocol, continues to see brokers come and go

The wirehouse has seen 14 individuals or teams leave and five join for a net loss of $2.4 billion in AUM


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print