Will Active Management Be In Vogue Again?

Many fund companies are expected to take a hit over the next quarter as a result of investors pulling money out of funds and parking their cash in money markets or Treasuries (see WSJ article). Mutual fund generate a large share of their revenue from fee income that is based on a percentage of assets under management. The market decline over the last month alone (recovered some yesterday) has reduced stock mutual fund AUM by $2 trillion, reducing a large chuck of fee generating capital. To add insult to injury, firms that generate a large portion of income from overseas are seeing even lower fees as the dollar strengthens.

Yet, everything may not be bad for mutual funds, hedge funds, and other forms of active management. As the market has declined, ETFs, which are often indexed to the S&P 500, DJIA, Nasdaq Composite Index, Russell 2000, or other subset of the market have seen their performance fall with the market, in many cases more than other funds under active management. While indexers will certainly point to the benefits of buying and holding for the long-term, individual investors looking at their financial statements and comparing returns to the ubiquitous lists of "star" mutual fund and hedge fund performance will no doubt begin to wonder whether it is worth giving up some return in order to have a professional actually manage the portfolio. Just as mutual funds were forced in some cases to lower fees in the 1990s as the market rallied and everyone felt they were a market genius (and index-based ETFs posted stellar gains by just riding along), the recent market downturn may have a reverse effect as investors realize they don't really understand the market or know what they are doing and need to pay-up to get professional management and stock selection. Ironically, the same funds that are being questioned for charging outrageous fees may be the same ones investors turn to for guidance and management.