Active Manager Flameouts Drive Investors to ETFs
December 9th 2011 at 1:01pm by Tom Lydon
The market’s wild volatility and herd-like movement has created an extremely difficult environment for stock pickers and caused some investors to abandon actively managed mutual funds for indexed exchange traded funds.
Even prominent fund managers are having trouble in the current environment. However, ETFs seem to have attracted a larger following as stocks move in tandem.
Bill Miller, manager of the Legg Mason Value Trust, was known for his uncanny ability to hand pick stocks, which helped the fund outperform the S&P 500 Index for a record 15 straight years, reports Herbert Lash for Reuters.
However, as the markets began to move in lockstep, driven by “risk-on” and “risk-off” macroeconomic events, Miller’s style of investment became harder to implement. Miller will be stepping down from his post in April.
Legg Mason recently filed to launch its first ETF. [Legg Mason Files Bond ETF]
“Markets can go into these phases where strategies which are pretty robust can come under a lot of pressure, and I think that’s clearly the case now,” Miller said in the Reuters article. “I love the values in the market. I hate the way in which these things are trading.”
Meanwhile, ETFs have gathered more than $1 trillion in assets and accounting for around 40% of total trading, according to market analysts.
ETFs have also come under fire during the recent abnormally high market volatility as some critics laid the blame on ETFs for exacerbating volatility, notably leveraged products. Others, though, say the critics are just trying to find a scapegoat. [BlackRock’s Fink Says Worried About Leveraged ETFs]
“There’s always been some sort of culprit out there that we blame,” Richard Keary, principal at Global ETF Advisors LLC, said, “and the easy ones to blame are the inverse and leveraged ETFs.”
According to Bianco Research, heightened macroeconomic uncertainty has brought correlation in U.S. stocks to all time highs. Specifically, 85.9% of U.S. large-caps are moving with the overall market. Since August 1, the S&P 500 has gained or lost 1% or more in two of three trading sessions. [Stock ETFs Move in Unison on Debt Crisis]
“Any heavy activity in ETFs will also have an impact at the sector level and carry through to the broader index,” Lionel Mellul, co-founder of Momentum Trading Partners LLC., said. “Essentially you trigger a shock wave on all the components.”
Max Chen contributed to this article.
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