Are All Passive Managers the Same?

An interesting study by Morningstar found that 95% of all mutual fund flows in the past decade have gone to those funds in the bottom 20% of cost.

In other words, investors are increasingly cognizant of how important fees are to their total returns. You know this already of course: you've probably seen it as an adviser, and you've also probably noticed that most funds have reduced expenses in the past several years - sometimes drastically.

Do your own shopping and see for yourself...the CataSelect passive solutions are 100% independent - constructed entirely from non-proprietary ETFs and they are the cheapest we have found with a 0% manager fee and underlying ETF cost of only 0.05%.

But you also know this: fees aren't the whole story.

There's also diversification, making investing easy, and knowing that the portfolio you're getting is as objective and independent as possible.

We were curious about these other factors in light of the low-cost trend. How easy and manageable is it to get a truly global, independent passive portfolio? The passive strategies tend to be the cheapest, so it should be fairly simple, right?

Shopping for a strategy

To answer this question we went shopping for a hypothetical client with some money to invest. We were looking for a single, low-cost, passive fund with about 75% exposure to equities and a global allocation. Something you could park your money in and rest-assured that your needs were being met.

We also had a preference for independence in portfolio selection.

After all, no one fund company has everything. While you don't need to own every single asset in the world to get a robust approximation of the global market portfolio, having access to more options can help you build a better one.

There is also compliance to keep in mind: Most advisers are concerned about conflicts of interest - the on-again/off-again DOL Rule not withstanding. Most advisers and most clients now have a heightened awareness of and a desire to steer clear of conflicts of interest. Knowing with certainty that your portfolios are constructed without any potential benefits for the manager is an important part of the process.

So how did it go?

Despite being pretty well-versed in the sector (we are a competitor, after all), we were actually surprised at how tough this assignment was.

We got a bit confused looking for fee information and clarity over at Loring Ward, which uses both Dimensional Fund Advisors (DFA) and SA Funds to manage their strategies, and embarked upon a lengthy process of finding an ETFs that would meet our cost expectations at BlackRock (though they do have a cool asset allocation calculator.) Vanguard looked promising- and how can you go wrong with Vanguard?...but we found they were a bit expensive AND while not obvious to most investors their average bid/ask spread on some of their ETFs were alarming.

Little wonder advisers still feel they have to manage their own strategies.

That said, we did find two that came close to meeting our objectives. Vanguard and DFA both offer relatively low-cost portfolios that get closer to full international diversification than most. The problem is that both still use only their own funds. And looking more closely, we'd probably want to see a little more international focus to get the full benefit of the global market portfolio.

Choosing the CataSelect Structured strategies

At the end of the day, we still like our strategies the best. That's unsurprising, of course: it's why we built them. They are completely, 100% independent - constructed entirely from non-proprietary ETFs - and they are the cheapest we have found with a 0% manager fee and a 5 bps underlying ETF cost.

For advisers, we offer up far more than a big brand name attached to an ETF. Our adviser partners get a fully-stocked library of communication resources that reflect their individual brands. Professionally written to engage clients and updated regularly for market news, our tools help you build your business instead of touting our won.

Do your own shopping and see for yourself. And when you're ready to simplify investment management, boost your client communications, scale your business, and grow - please give us a call.