A recent Bloomberg article highlights a growing trend that shows no signs of slowing: managers using ETFs to build stand-alone portfolios continue to take market share away from traditional actively managed mutual funds. Legg Mason’s Bill Miller, who has been one of the more popular active fund managers, concedes in the article that “ETF asset-allocation products are a permanent share taker from traditional asset managers like ourselves”.
So what’s driving this trend? Portfolio managers are placing a greater emphasis on asset allocation and relying less on trying to pick individual stocks and bonds. A landmark study of large pension funds concluded that, on average, more than 90% of the variation in portfolio performance could be attributed to asset allocation. With the proliferation of ETFs, portfolio managers now have tools that weren’t readily available even a few years ago and can more easily implement robust asset allocation strategies. ETFs allow for easy access to a wide variety of asset classes including alternative investments (commodities, currencies, real estate, etc.) which have historically been uncorrelated to equity and bond markets. In addition, ETFs offer potential benefits such as lower expense ratios, greater tax efficiency, and more transparency.
The bottom line, as Scott Burns (head of Morningstar’s ETF research) points out in the article, is that “there’s a shift going on from seeking outperformance on an individual-company basis to seeking it on a macro basis”. And more and more portfolio managers believe ETFs are the best way to access this “macro” exposure.
