The whole of the mutual fund distribution space is “stuck,” if for no other reason than none of its primary practitioners can bring themselves to categorically call a spade a spade.
What and where’s the spade?
Actively managed mutual funds are the spade.
The mutual fund food chain- from fund sponsors to wire house brokerages to discount brokerages and to insurance and annuity companies – has far too many current and historical earnings and cash flows tied to actively managed mutual funds to be out on the streets hammering away with some plain and simple truths on matters that divide the exchange-traded fund (ETF) and actively managed mutual funds – transparency of holdings, breadth of coverage, consistency of coverage, cost, tax advantages, trading flexibility for managing risk, and the persistent failure of active managers to beat generic passive index benchmarks.
For those businesses with a significant portion of their earnings and cash flow streams tied to actively managed mutual funds, the truth hurts. Facing, acknowledging and communicating the truth comes with risk of alienating clients and advisors who have been trained or conditioned over the past twenty years to believe the hollow, active mutual fund manager storyline of chest-beating and hard-selling, of managers who’ve realized a two or three year streak against their peers or an index, and their misplaced confidence and hints that more of the same certainly must follow despite requisite disclaimers and the sheer weight of historical evidence to the contrary.
Given the above realities, ETFs represent superior alternatives in nearly every corner of the investment universe. Conflicted, inconsistent and flawed advice has come to typify active mutual fund manager-based so-called solutions and emerged against both a backdrop of reinforcing secular trends (interest rates, inflation, dollar softening) and a series of benign and thus psychologically reinforcing, economic shocks over the past twenty years. Both the mutual fund message and its messengers now clearly represent second class solutions for managing risk and returns. And that’s why mutual fund companies are stuck.
