Passive is the new black
“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle,” Buffett wrote in the famous annual letter of Berkshire Hathaway.
Yes, there is the innovation of the ETF financial structure that we shouldn’t forget was incubated in the womb of the nowadays-incumbent land. It was early 1993 that the first ETF, the S&P SPDR, began trading. This is was a time of financial engineering nirvana in the WTC. I was there, sitting at the desk that Myron Scholes ran, the fixed income structured products desk at Salomon Brothers.
Yes, there is also the innovation of robo-advisor investing that Wealthfront and Betterment led. Adam Nash and Jon Stein both merit substantial credit for advancing the idea that fees eat into returns in a significant way in the long-run, and designing a tech-enabled solution.
Vanguard’s passive investing cult comprises of mutual funds and ETFs. In 2016, Vanguard reports that net inflows into their funds amounted for $227 billion in new money, compared to $407 billion for the industry – more than half of the total assets (Source).
The ETF industry in the US showed record inflows: $284billion. Don’t miss the State of ETFs keynote given at InsideETFs in January, by Dave Nadig and Matt Hougan of ETF.com.
The robo-advisory space has shown impressive growth, with Betterment and Wealthront amassing around $10bil (doesn’t mean they are profitable since the CAC remains very high). Vanguard’s robo (also not profitable yet) with $47billion, Schwab with $12+ billion and the rest of the US robo D2C space around $15.5billion.
I also need to point out an even stronger trend towards indexing vehicles, that relates to ETF Trading and its correlation to market volatility.
Flow numbers in the US into general passive vehicles of all sorts (mutual funds or ETFs) are even higher: $844 billion for 2016!
But it is not just flows, it is also the amount of ETF trading, that tells an even stronger story. ETF.com tracks the amounts and shows a fairly steady and significant trading activity over the past three years, around 30% of total value on the exchanges comes from ETF trading. They also report that the correlation of the ETF trading activity with volatile trading periods is significant but heading lower, from 70s to the 60s (VIX versus ETF trading).
Even Warren Buffet, echoed in this year’s annual letter for the first time, that when he buys a company it doesn’t mean that it is forever.
“But we have made no commitment that Berkshire will hold any of its marketable securities forever.” (Annual Berkshire Hathaway shareholder letter)
Actively managing passive investments, is the puzzle
The passive low cost investing culture, is here to stay and the only valid question going forward is
“How can we make the best out of it, for the long run (of our life-time)?”
Given that we are embracing low-cost investing at various rates in different regions, the other major reason we manage poorly our money, is in a nutschell
All kinds of cognitive biases
Source: TED talk by Victor Haghani, of Elm Partners, who uses the puzzle of the missing billionaires. This helps us explore how and why most of us fail to capture the returns offered by the market.
We are in dire need of an approach that combines the best features of low-cost index funds with the appealing and successful aspects of active management, all for a 1/10th the price that many of us currently pay.
Who else can help us on this front? Maybe Watson? One thing is for sure, we will be seeing more Deep Learning applications to managing portfolios that use low-cost financial structures and mitigate for the cognitive biases.
For now, here a few straightforward Fintechs to consider as an investor or an independent advisor.
Elm Partners, the US based Fintech can be an “advisor” to manage our assets Forever at a low cost (discretionary management only for accredited investors, 12bps per annum). Elm Partners, was founded and is run by Victor Haghani, a partner at LTCM, which gives an additional message as to where the industry thinking is heading to.
Logical Invest is a global Fintech that offers services using low-cost ingredients and sophisticated quant rebalancing but for self-managed accounts. They offer 13 strategies (monthly rebalancing signals provided) with a monthly subscription model (from $30 per month per strategy). These are used by DIY investors and financial advisors. They recently launched The Quant Trader application, coined as the Swiss army tool for investing. It allows optimization between the 13 existing strategies and customization. They also partnered with The Estate Planners Group (US investment advisor) to offer separately managed accounts based on the Logical Invest signals.
Alpima, is a UK based Fintech but a global Fintech, that offers multiple strategies (coined Bricks) that can be used independently or to create a multi-strategy portfolio (coined as Stack). There is an extensive menu of Bricks (e.g. from Multi-asset, to others Equity focused) that can be customized and can be used to create a personalized Stack that is dynamically optimized and rebalanced. The advisory fee is 40bps per annum and combined with low cost execution (e.g. Interactive Brokers) can compete in solving the missing billionaire puzzle. The audience is DIY investors, financial advisors and private bankers with discretionary assets under management.
Which other Fintech is competing to solve the “missing billionaire puzzle” in a simple way?
Disclosure: I am a subscriber to the Logical Invest strategy signals.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.