The Closet Indexer That Could
High expenses? High market correlation? No problem!
In the words of Morningstar's Don Phillips, today's fund investors buy the U. On the left end of the U are the cheapest funds with the least originality: index funds. At the right end are the costliest funds with the most originality: hedge funds for the institutions and idiosyncratic and/or go-anywhere funds for retail buyers. (Reverse the directions if you like; this is not a political matter.) Currently, these two ends get the money, while the middle of the U languishes.
It's easy to understand why this trend exists. The two ends are pure ingredients. The left end is beta without alpha--solely exposure to a given market, untainted by manager intervention, sold at a very low cost. The right end is the opposite: alpha without beta. It delivers solely a manager's contributions, untethered from market movements, and is sold at a high cost. (This isn't strictly correct, as funds do not free themselves entirely from the markets, but conceptually that is the notion.) Mix and match the two ends for the desired blend of alpha/beta, and for the desired cost. Avoid the muddle in the middle.
John Rekenthaler does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.