We are definitely living through the financial equivalent of the steroids era on Wall Street, with celebrity fund managers jacking up their assets under management and posting (allegedly) too-good-to-be-true returns. But beyond the ego-driven corruption of places like Manhattan and Greenwich, there are hopeful signs that things might be getting better in my industry. Not surprisingly, two of the best examples of this trend come from a place regular readers of this blog know I am quite fond of: Texas.
The first, “Where the Smart Money is Headed” explains why Austin’s Dimensional Fund Advisers has quietly grown to $300 billion from $36 billion eleven years ago:
All money with DFA is managed passively. While that may sound like an oxymoron, DFA’s style of “structured investing” is a proven strategy that falls somewhere between indexing and active management, and is based on the notion that markets are efficient. That means you can’t beat the market via stock-picking or market-timing, but it doesn’t mean you can’t beat the market.
DFA’s strategy is anathema to most mutual funds, which rely exclusively on “stock-picking” and “market-timing”–and charge huge fees in the process. Don’t get me wrong, I do believe that truly talented fund managers can beat the market. But there just aren’t many of them out there who can do it consistently. The dirty little secret of money management is that most stocks and bonds are efficiently priced. Finding profitable inefficiencies–especially when you’re running billions of dollars–is brutally hard. That’s why DFA’s approach is so great: the efficiency of the markets is a feature of its strategy, not a bug.
(It’s not discussed in the article, but DFA’s managers did something else smart recently: they moved to Texas from the tax-hell of my state of California. That alone isn’t going to earn their clients more in investment returns, but it’s shows how savvy they are.)
The second piece in Barron’s profiles Dallas-based investment adviser Dodee Crockett. Even though Crockett does steer her clients’ money into actively-managed funds, she keeps them away from loosely-regulated investments like–ahem–hedge funds and designer products like mortgage-backed securities:
“We consider ourselves the core portfolio manager,” says the Merrill Lynch financial advisor, whose nine-person practice in Dallas manages $1.3 billion. “I’d rather not appeal to the side of someone that’s wanting to swing for the fences.”
Again, this philosophy is anathema to the average “alpha”-obsessed financial professional–and that’s a good thing. To paraphrase the great John Bogle, the inventor of the index fund, It’s time for investment managers to get back to being stewards of their clients’ wealth instead of salesmen trying to take as much of it for themselves as they can.