Content provided by Joe Smith, CFA, CLS Senior Market Strategist
Our industry continues to undergo a deep transformation that is shaking the very foundation of investing. Over the last two decades, indexing has moved from an afterthought for many investors to an increasingly dominant trend that has allowed many to access the global markets at a much cheaper price. Now, with new regulatory trends furthering the push for greater accountability and transparency, while placing increased emphasis on serving the best interests of end investors, our industry is facing a reality of lower fees, increased competition, and what many pundits are now calling the death of active management.
But is active management really dead? As a portfolio manager at CLS Investments, I don’t think so. Regardless of any one investor’s approach, the evidence has proven over time that markets are beatable. A consistent focus on valuations, identifying companies with well-run businesses, and measuring the uncertainty of one’s investments via Risk Budgeting and risk management over time can translate into better results. I believe the current trends are simply forcing a transition in the methods investors use to beat the markets — with the help of indexing and ETFs.
Wait, did I just say investors can now potentially beat the markets with indexing and ETFs? Absolutely. In fact, smart beta ETFs are leading the charge for investors to do just that. Smart beta ETFs are different because they bring the best of both worlds together to formulate an investment portfolio. In many cases, smart beta ETFs are responsible for replicating commonly followed investment strategies most active managers have been adhering to for decades. The only difference is a smart beta ETF’s main role is to translate what used to be a manager’s unique and expensive alpha into more transparent and affordable beta.
So what do you get when you put all of these thought-provoking ideas together? In my honest opinion, it’s a revolution. A revolution for many investors to reclaim what appears to have been lost in the decades-old objectives of professional money managers: to consistently deliver modest performance that can help investors meet their long-term goals. The only difference is being active can now mean being passive too, while utilizing the power of indexing and smart beta ETFs. Smart beta ETFs represent the essence of active management merged with the long-term benefits of transparent, lower-cost, rules-based indexing. Welcome to the new era of active management.