Don't Blame the Intermediaries
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Friday, August 07, 2015

Don't Blame the Intermediaries

If your performance sags a bit as you grow, don't blame the financial advisors, consultants, and other intermediaries whom you're now worried about pleasing.

That's the upshot of one of Morningstar guru John Rekenthaler's latest columns. Rekenthaler ponders whether intermediaries are "hampering active management" by constraining once-successful managers with style boxes and such.

The piece is a reaction to an article, "Alpha Wounds: Benchmark Tail Wags the Portfolio Management Dog," penned by an ex-PM, Jason Voss of the CFA Institute. Voss worries that successful boutique managers end up slipping as they grow thanks to distracting themselves with sales and marketing and to intermediaries demanding things like style purity.

Rekenthaler counters that managers' less exciting returns as they grow can be explained simply by mean-reversion (and survivorship bias). Many boutiques appear, but only those that put up good performance can grow, or even survive. Yet over time, if performance reverts to the mean, those same outperforming boutiques will appear to perform more in line with the averages or benchmarks.

"To the extent that active management struggles to compete against index funds, consultants would seem to be only a minor factor," Rekenthaler concludes.

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