Many people have approached me in the past suggesting that I am unduly critical of active products and strategies. Perhaps not too surprisingly, I counter that perhaps it is THEY who are unduly critical of passive products and strategies.
I wouldn’t mind active strategies at all if they were as cheap, pure, broadly diversified and tax-effective as passive ones. In fact, if they did all that, I’d give serious consideration to recommending them. With that said, I’m writing today to offer a bit of a truce.
To begin, my simple point in what I have been espousing in my column over the years is that advisors should try to do what is best for clients and in so doing (i.e. irrespective of their personal preferences), they should disclose all material considerations that would help an investor to make an informed decision. To me, deliberately not mentioning something important to someone who is relying on your advice is tantamount to willfully misleading that person.
Imagine if a surgeon deliberately withheld material information about a procedure in which your very health was on the line. That’s not very professional, is it?
Study after study has shown that product cost and portfolio turnover are drags on overall long-term performance and that clients are often their own worst enemy by trading in and out at the wrong time and altogether too often. There’s a lot going on in portfolio construction and monitoring. In fact, I sometimes say that my job is to help investors make suitable long-term, client-specific, risk-adjusted, after-tax, after-cost investment decisions.
My simple point here is based on the five fundamental investment product considerations listed above, my view has been that it generally falls to companies like Dimensional Fund Advisors, Blackrock (iShares) and Claymore to come up with products that best meet the criteria. Pro Financial also does a reputable job.
Today, I’m adding another company to the list. Readers may be surprised to learn that the company in question is Steadyhand , an actively-managed, visionary firm founded by former PH&N CEO Tom Bradley.
While Steadyhand’s fees are still decidedly higher than those from the other companies, I cannot help but think that Bradley is on to something important with at least one of his innovations. That innovation is a fee reduction based on the time you hold his products. There’s one fee for the first five years and a reduced fee for the next five. The lowest fee will ultimately be reserved for people who have invested with him for 10+ years.
Since numerous studies have shown that like product costs, portfolio turnover correlates negatively to long-term performance, I’m delighted to see that there’s someone out there who ‘walks the talk’ about taking a long-term perspective on capital markets.
The funds will likely also prove to be riskier than most, given their high concentration (typically 20-30 companies) in relatively few securities. Then again, if you’re genuinely trying to ‘beat the market’ it helps to be rather different from it. In a lovely bit of wordplay, Bradley even calls his funds ‘undex funds’, using a clever gimmick that was first popularized by 7 Up a generation or two ago.
For advisors who are interested in a core and satellite approach, I cannot think of a better company to perform the mandate of ‘seeking alpha’. To be clear, I still don’t think that Alpha exists, but I certainly do think that if I’m wrong, Tom Bradley’s people will stand a far better chance of finding it than pretty much any other stock-pickers in the retail mutual fund space today.