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BETA for cheap?

By Steven Miyao

In conducting research for our recent "The Future of Distribution" report, I found it interesting that none of the actively managed fund companies that we interviewed--23 of the top 50 firms by AUM--had any plans for getting in on the passively managed game.

New data from FRC shows that Vanguard surpassed American Funds in last year's fund flows. What is even more fascinating is that other beta players, such as Barclay's Global Investors and State Street Global Advisors, also did very well.

This has severe pricing implications. The distinction between alpha and beta performance is now more transparent than ever, and advisors are not willing to pay for actively managed products that are really just expensive closet beta funds. Instead, advisors are seeking cheap beta products such as ETFs. On the other hand, only true alpha players are able to command premium fees.

Surprisingly, our study shows how the firms in the industry are at the same time complacent and yet strangely confident in taking on competitors whose strategies, strengths, and weaknesses resemble their own. Their obsession with familiar rivals and products, however, has blinded them to threats from low-cost competitors such as Vanguard, BGI, and State Street.