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 The fund companies aren't giving up their efforts to win investment
dollars with their stockpicking prowess. Rather, they are floating
funds that are increasingly niche-oriented in the hope of getting
shelf space next to the generic S&P 500 index and other passive
funds that are sucking cash out of active funds. Last year, passive
funds brought in $166 billion in new investor dollars, while
investors pulled $98 billion out of traditional funds run by
stockpickers.
The idea behind the push to specialized funds is that as index funds
and exchange traded funds increasingly take up market share in the
broadest categories, fund companies can still find profits in the
spots where passive funds can't - or won't - compete.
Of the new actively managed stock funds introduced by firms in 2014,
more than half focused on niche strategies or markets, according to
Morningstar data. New funds in 2014 included the ATAC Beta Rotation
fund, which attempts to move in and out of sectors based on
inflation expectations, and the 3D Printing and Technology fund.
A new actively-managed fund typically requires as much as $60
million in start-up costs, and will often need that much in assets
before they become profitable. Index funds, by comparison, typically
have much higher break-even points because of their lower fees, said
Luke Montgomery, an analyst at Sanford C. Bernstein & Co.
If a fund doesn't become a hit with investors, then companies can
always pull the plug. The average fund lasts just 7 years before
it's closed, according to Lipper data. Most firms either sell the
fund, merge it with another one, or send cash back to their
shareholders for the value of their holdings.
"There's not a lot of whitespace left that isn't being taken up by
passive funds or well-established active funds. Unless it's a fund
manager starting up his own shop, the only way for most funds to
break in is to market a more sophisticated strategy," said Todd
Rosenbluth, director of mutual fund research at S&P CapitalIQ.
STOCKPICKING REWARDED?
Portfolio managers of active funds that do come to market say that
they think the stockpicking will be increasingly rewarded as the
current bull market which began in 2009 begins to wane.
"I would like to think that people who are in our fund recognize we
are five years into a bull market built upon central bank
intervention. I think that investors in our fund are a more
sophisticated type who looking for risk management techniques," said
Edward Dempsey, co-manager of the ATAC Beta Rotation fund, launched
last year.
Funds like Dempsey's face an uphill battle for assets. In 2014, the
average active fund underperformed its passive counterpart by an
average of 3.1 percent, the widest margin in more than 10 years,
according to Lipper.
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"Even the most ardent proponents of the efficient market hypothesis
will say that there are pockets of inefficiencies, and the most
common is small-cap and international stocks," said James Oberweis,
the president of Chicago-based Oberweis Funds, which launched a
international stock fund last year.
Indeed, 77 of the funds that launched last year - or 40 percent of
the total - were categorized as emerging markets, international, or
small-cap funds, according to Morningstar. There were 48 new large
cap funds, with the majority of those focused either on dividend
strategies or so-called concentrated funds, which only hold a
handful of stocks and are considered riskier options.
Los Angeles-based Causeway Funds introduced a new fund focusing on
international small-cap stocks in 2014 in part because it saw it as
a market where there was little competition from passive competitors
and its stockpicking process would be more valuable, said Harry
Hartford, president and a portfolio manager at the firm.
"Our thought process was, 'Is there a niche that we can fill in the
marketplace, and do we have the resources to fill that niche?'" he
said. The Causeway international small-cap fund is lagging its
benchmark by 0.1 percent since it launched in October.
ATTRACTING DOLLARS
Fund managers say that outperforming the benchmarks is the most
reliable way to attract investor dollars in a time when passive
funds are gaining more traction. While brokers may have an incentive
to push actively managed funds because they can get earn commissions
for selling them, few investors will opt for a fund that has a poor
track record.
John Langston, a Fort Worth, Texas-based fund manager who launched
the Panther Small Cap fund last year, said, "If you're putting up
good performance numbers, that's the best way to get your story out
there and hope investors follow."
(Reporting by David Randall; editing by Linda Stern and John
Pickering)
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