We have always argued that actively-managed mutual funds are essentially a marketing package for two fundamentally different formations: a large deposit of beta and a vein of pure alpha.  Unable to travel either the peaks and valleys of beta or the undulating topography of pure alpha, mutual fund companies long ago found a neutral territory that seems to have satisfied investors worldwide for over 50 years.

Now the landscape is changing.  Or perhaps more accurately, investors are now expressing a desire to try their hand at portfolio construction using basic ingredients such as cash, beta, and alpha.

This FT article (”Equity fund outflows bring need to adapt“) is a must read for anyone who thinks we’re nuts.  The newspaper describes the changes facing the asset management industry as nothing less than a “seismic shift”.  Kevin Parker, the head of Deutsche Bank’s $800 billion money management business tells the FT:

“On one side, you have exchange-traded funds and, on the other, you have [private equity firm] Blackstone and the hedge funds. It leaves firms like ours, traditional long-only buy-side firms, needing to make some very tough decisions.”

The FT also cites Jim McCaughan, CEO of Principal Financial Group as an advocate of alpha-centric thinking:

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