In the late 1990s, I found myself seated at the Morningstar Investment Conference next to Morningstar's Don Phillips as famed fund manager Bill Miller of the Legg Mason Value Trust—slayer of the S&P 500, mesmerized the audience with a height-of-the-dotcom-boom presentation on why Amazon was a value stock.
As Phillips remembers it, another famed value manager, David Dreman, shot back at Miller that his arguments about Amazon assumed everyone in the world and on worlds yet to be discovered would use Amazon's service.
Miller was right (additional planets notwithstanding) about Amazon, but just about everything else has gone wrong for the mutual fund industry's actively managed domestic equity fund legends of yesteryear.
Mutual funds used to worry about losing their star managers to hedge funds, like Jeff Vinik of the Fidelity Magellan Fund (now owner of the Tampa Bay Lightning). Now, they don't have time to worry about losing stars to hedge funds or even the owner's arena luxury box, but about the rise of ETFs, low-cost index funds, and the reams of data on the inability of the average active fund to beat the benchmark.
The mutual fund market has come full circle from an era when active managers like Peter Lynch (Vinik's predecessor at Magellan) and Miller walked on water to a world in which the general investor assumption is that an active manager can never beat the market.
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Now, as the stock market extends a multiyear bull market trend but actively managed domestic equity funds don't reap the benefits in a way they would have in past decades, this slow shift away from active funds has given way to a straightforward question:
Can the former divas of the mutual fund world's active funds ever regain their center stage status?
As fund executives meet this week for the 25th Morningstar Investment Conference, the odds seem to be stacked against them. The post-traumatic stress of the financial crisis, skepticism about the financial services industry, and the slow burn of the biggest driver of active managers' success —baby boomers' accumulation of wealth—are all weighing heavily on the future of active management.
In 2007, Miller's Legg Mason Value Trust had upwards of $20 billion in assets. Today it has $2.3 billion in assets. Miller's legendary streak against the S&P 500 long ago ended (in 2006). Legg Mason Capital Management, where Miller was chairman during his glory days, was folded into a larger New York-based investment unit at the beginning of this year, and Miller now manages one fund.
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"The financial crash was the last blow," said Phillips, president of Morningstar's investment research division. "I don't think it can be reversed. Most of the money still in active funds won't be going away soon—but these fund managers have to deliver to a very skeptical audience. Today, there is no longer manager worship," Phillips said. When the assets of the baby boomers are transferred to the next generation, the "jump ball" with index and active facing off, there is every reason to believe the majority will go to passive strategies.