Alpha-centric investing described as a “seismic shift”
May 9th, 2008 | Filed under: Institutional InvestingWe 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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I agree that this is the direction that the plan sponsor community is taking, and as a provider of absolute return strategies for more than 17 years, I am certainly pleased to see this development. However, I am concerned that plan sponsors and their consultants are incapable of making two important decisions (alpha and beta providers) when they’ve had difficulty making one decision in the past. This may be a formula for disaster in terms of funding.
BTW, 130/30 funds are not alternatives, as many unfortuantely have described.