How Fintech Wrecked Mutual Funds

Note from the CEO: The “jigs up” (or was up) for a whole lot of actively managed mutual funds because of………THE INTERNET & FINTECH. A great piece that makes the case that because of these two new technologies investors could actually see funds performance compared to others. Oh yeah, its called transparency, which is a very bad thing if your returns lag others. Even worse, investors can compare lagging funds (and there are a lot) to a whole host of bench marks that the internet began bringing to your desk a few years ago. Interesting.

It’s no secret that flows to passive funds are on the rise as actively managed funds in the aggregate are contracting. The Wall Street Journal had an interesting article this week about the “death” of the stock picking business, where they noted based on Morningstar data that $1.3 trillion has been flowing into passive vehicles over the past three years, while a quarter of a trillion dollars ($250 billion) was leaving actively managed funds at that same time.

What that means is that not only are we buying passive with our new dollars – so the inflows to passive are much bigger than active – but we’re now actually starting to proactively sell active funds to rotate into passive. The net flows out of active are negative, while passive flows are about five times as large!

I think the real reason that actively managed funds are dying now is, to put it in one word, the internet. The internet did it………basically, most people had no idea how their active managers were actually doing, compared to any relevant alternative, like an index! There really were no effective comparisons going on between funds to figure out whether they were actually doing a good job beyond just going up in value. Then the internet showed up, and it all changed……

The second important thing about the impact of the internet on evaluating funds is that it not only became possible to evaluate existing funds, but information available to evaluate new funds was more accessible than ever….”

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