WEBVTT - The Mutual Fund Is Very Much Alive and Well 0:00:05.960 --> 0:00:11.680 Welcome a trillions. I'm Joel Webber and I'm Eric belchunis 0:00:12.880 --> 0:00:16.000 Eric happy last days the summer? You're remote, I'm remote. 0:00:16.480 --> 0:00:19.240 Let's do this together one more time, remote. 0:00:19.079 --> 0:00:23.400 One last hurrah before the cold bucket of water of 0:00:23.480 --> 0:00:24.639 return to office sets in. 0:00:25.400 --> 0:00:28.960 You've got a new team member who is yes. 0:00:29.600 --> 0:00:32.320 So believe it or not. We hired a mutual fund analyst, 0:00:33.080 --> 0:00:36.600 which when I posted on LinkedIn that we're looking for this, 0:00:36.600 --> 0:00:39.400 this guy replied with, this is like Elon Musk looking 0:00:39.440 --> 0:00:43.360 for an internal combustible engine designer. Like what are you 0:00:43.440 --> 0:00:45.800 talking about, right, because everybody kind of knows me as 0:00:45.880 --> 0:00:48.520 ETF and passive and I read about Vanguard a lot 0:00:48.560 --> 0:00:51.599 like why would you do this? But we noticed when 0:00:51.680 --> 0:00:54.120 we covered mutual funds and notes, because sometimes we do, 0:00:54.520 --> 0:00:57.400 the readership was really good because a lot of terminal 0:00:57.480 --> 0:00:59.960 users are these mutual fund companies, and the sort of 0:01:00.240 --> 0:01:03.040 horse race between them who's winning, who's leasing, really played 0:01:03.040 --> 0:01:06.280 well on the terminal and it was still twenty six 0:01:06.400 --> 0:01:09.280 trillion dollars in mutual funds. And there's a lot of 0:01:09.319 --> 0:01:11.560 good active managers, even though the majority of them tend 0:01:11.640 --> 0:01:14.520 to not beat the benchmark, And so we just thought 0:01:14.520 --> 0:01:17.399 we should cover this and also add a counterweight to 0:01:17.760 --> 0:01:21.319 their team's sort of bias towards passive and ETFs, And 0:01:21.440 --> 0:01:24.000 so we hired David Cohene, who joined us a couple 0:01:24.040 --> 0:01:27.360 months ago and has been kicking butt right off the bat, 0:01:27.840 --> 0:01:31.000 writing a lot of notes, and this week he had 0:01:31.040 --> 0:01:33.399 one that crushed it. It got the equivalent of like 0:01:33.440 --> 0:01:37.360 a three run Homer in sort of readership terms for US, 0:01:38.160 --> 0:01:39.640 and so I thought we should just go with some 0:01:39.680 --> 0:01:41.960 of his interesting finds because there's been a couple of 0:01:42.000 --> 0:01:44.800 notes he's written that I've just just been really surprising 0:01:44.840 --> 0:01:46.720 to me and interesting, and I thought we should, you know, 0:01:46.760 --> 0:01:47.640 dive into some of those. 0:01:48.800 --> 0:01:51.960 Can't wait to explore this with David Cohne, who is 0:01:52.120 --> 0:01:56.280 a mutual fund analyst with Bloomberg Intelligence, this time on 0:01:56.360 --> 0:02:02.559 Trillian's five Interesting Finds from the Mutual fund world. David, 0:02:02.560 --> 0:02:03.720 Welcome to Trillions. 0:02:04.880 --> 0:02:05.720 Thank you for having me. 0:02:06.240 --> 0:02:08.639 Okay, so, how do you feel about ETF We got 0:02:08.680 --> 0:02:09.280 to start there. 0:02:10.080 --> 0:02:13.000 I mean, they have their purpose more of an active guy, 0:02:13.400 --> 0:02:16.919 So I like mutual funds and active ETFs, but you know, 0:02:16.960 --> 0:02:18.880 there's a lot of areas of the market where many 0:02:18.880 --> 0:02:21.959 managers struggle. So ETF serve a great purpose and a 0:02:21.960 --> 0:02:23.079 lot of portfolios. 0:02:23.400 --> 0:02:25.120 Do mutual funds still exist? 0:02:26.120 --> 0:02:30.120 Yeah, yeah, there's a ton of assets. You think of 0:02:30.120 --> 0:02:33.960 all the defined benefit plans for one k's, there's just 0:02:34.120 --> 0:02:36.560 they're all mutual fund assets. A lot of it's still 0:02:36.600 --> 0:02:39.520 actively managed, so they still have their place. 0:02:40.400 --> 0:02:44.040 Okay, So you wrote a recent note that really did 0:02:44.120 --> 0:02:47.720 crush it on the Bloomberg terminalized Eric mentioned, and it's 0:02:47.760 --> 0:02:51.480 about QQQ, which we actually the last episode of Trillions 0:02:51.520 --> 0:02:55.399 was all about how QQQ is this wildly successful ETF 0:02:55.760 --> 0:02:59.200 and yet makes no money for Invesco, its owner. You 0:02:59.240 --> 0:03:02.520 actually almost one up dust. What did you discover in 0:03:02.560 --> 0:03:03.480 this note? 0:03:03.760 --> 0:03:06.680 Well, I mean, if you look at the QQQ, it's beaten, 0:03:06.880 --> 0:03:09.320 you know, the major market indexes. You look at some 0:03:09.320 --> 0:03:12.799 of the other ETFs like SPY and VTI, and it's 0:03:12.880 --> 0:03:15.760 just destroyed those over the last fifteen years. And it's 0:03:15.800 --> 0:03:19.200 also been destroying just about every single mutual fund. But 0:03:19.240 --> 0:03:21.440 there's been about a handful of mutual funds that have 0:03:21.520 --> 0:03:26.320 been able to outperform the QQQ, basically by taking more risk, 0:03:26.520 --> 0:03:31.400 whether that's concentrated bets or investing in lower quality companies. 0:03:32.560 --> 0:03:35.640 Okay, So talk to us about this mutual fund of note. 0:03:36.480 --> 0:03:39.760 Well, the big one is the Baron Partners Fund, managed 0:03:39.800 --> 0:03:42.960 by Ron and Michael barn This fund's been around for 0:03:43.000 --> 0:03:46.240 a while. It's actually outperformed the QQQ over five, ten 0:03:46.400 --> 0:03:51.360 and fifteen years. It's fifteen year annualized return to seventeen 0:03:51.440 --> 0:03:53.760 point eight, which is pretty good. And the thing with 0:03:53.840 --> 0:03:58.120 this fund is it's extremely concentrated. It only held about 0:03:58.160 --> 0:04:03.040 twenty stocks as of June thirtieth, with a allocation of 0:04:03.040 --> 0:04:06.360 about forty point five percent to Tesla, which is pretty 0:04:06.400 --> 0:04:09.040 huge for a mutual fund. You know, none of the 0:04:09.040 --> 0:04:13.360 big company's, big mutual fund families typically allow their funds 0:04:13.400 --> 0:04:16.400 to be this non diversified. And it's really kind of 0:04:16.440 --> 0:04:19.240 written Tesla the last few years to outperformance. 0:04:19.760 --> 0:04:22.920 Yeah, this is so interesting, Joel, because David's looking through 0:04:23.080 --> 0:04:26.520 thousands of funds. This isn't even just growth managers. Anybody 0:04:26.600 --> 0:04:28.800 beat the cues. And as we said last week, the 0:04:28.839 --> 0:04:31.200 cues can be bought for twenty basis points and now 0:04:31.240 --> 0:04:33.120 fifteen there's a mini me cues that does the same 0:04:33.160 --> 0:04:36.680 thing for fifteen basis points. And think about that one 0:04:37.480 --> 0:04:41.040 soul fund and what did that fund do? It got crazy. 0:04:41.560 --> 0:04:44.040 I mean, we've been talking on the team lately about 0:04:44.040 --> 0:04:45.599 how in order to beat the cues, you have to 0:04:45.680 --> 0:04:48.680 kind of forget your CFA, you have to forget everything 0:04:48.720 --> 0:04:51.919 you learned and just go wild. I'd even think the 0:04:51.920 --> 0:04:54.200 Baron Fund, that the one that beat it, went even 0:04:54.360 --> 0:04:57.400 you know, more wild than Kathy would, because Kathy would 0:04:57.440 --> 0:05:01.000 in her portfolio, she has Tesla, and she Tesla obviously, 0:05:01.279 --> 0:05:03.560 but when Tesla has a nice run, she'll sell it 0:05:04.360 --> 0:05:07.000 to keep the waiting at ten percent or eleven percent, 0:05:07.080 --> 0:05:10.400 so she's always profit taking. This guy just let it run. 0:05:11.000 --> 0:05:14.279 And so he let this one stock run, which denominated 0:05:14.320 --> 0:05:18.520 the portfolio, and it really gave him the juice, and 0:05:18.560 --> 0:05:21.560 so he just got crazier than the cues. And I 0:05:21.640 --> 0:05:25.200 just think this is a really I don't know if 0:05:25.240 --> 0:05:28.400 ironic or a conundrum, which is that all these managers 0:05:28.440 --> 0:05:31.400 go to schools, they take all the tests, they have 0:05:31.480 --> 0:05:35.520 the numbers, and they see these highly these stocks with 0:05:35.680 --> 0:05:41.080 just really high valuations. They're expensive, and their CFA brains 0:05:41.080 --> 0:05:42.880 are like, there's no way this can keep going up. 0:05:42.920 --> 0:05:45.760 I've got to invest in something that's cheaper, and that 0:05:45.920 --> 0:05:49.080 just hasn't worked. Now it's some of it you can 0:05:49.120 --> 0:05:51.680 beat this spy that way, but the CUES is like 0:05:51.800 --> 0:05:54.680 just full of momentum and just the juggernaut I compared 0:05:54.720 --> 0:05:58.000 to a locomotive train, And it's just interesting. And so 0:05:58.200 --> 0:06:00.839 I think when when Dave wrote that no this week 0:06:01.279 --> 0:06:04.200 that only one manager beat the mighty Cues, I think 0:06:04.240 --> 0:06:06.480 a lot of our clients were like, yeah, I wonder 0:06:06.520 --> 0:06:09.920 who it was, because I know I didn't. And so 0:06:09.960 --> 0:06:12.480 it's just interesting and this could all change. The CUES 0:06:12.960 --> 0:06:16.200 is a you know, has a high valuation, right, a 0:06:16.279 --> 0:06:19.839 high average pe ratio. So if there's a move to 0:06:19.920 --> 0:06:24.040 value that's long term, these people could outperform the cues 0:06:24.080 --> 0:06:25.680 in mass. I'm not saying it can't happen, but the 0:06:25.760 --> 0:06:29.840 last fifteen years it's really just been almost impossible to beat. 0:06:30.360 --> 0:06:33.200 So Dave. Obviously the knock on active is always that 0:06:33.880 --> 0:06:36.640 you might be able to beat something, but by the 0:06:36.680 --> 0:06:39.599 time you account for fees, maybe not so much. What's 0:06:39.680 --> 0:06:42.320 the fees look like for the fund that they've been 0:06:42.360 --> 0:06:43.920 able to crush the cues like this. 0:06:45.360 --> 0:06:48.400 It's not terrible. It is still a little bit higher 0:06:48.440 --> 0:06:50.279 than I mean, obviously it's a lot higher than the 0:06:50.320 --> 0:06:56.159 typical ETF. So an investor is basically willing to pay 0:06:56.200 --> 0:06:59.240 a fee to outperform the cues, which is the case here, 0:06:59.320 --> 0:07:01.760 and you know, willing to take that risk that comes 0:07:01.800 --> 0:07:02.039 with it. 0:07:03.000 --> 0:07:05.120 I mean, you know, and this is how you can 0:07:05.160 --> 0:07:07.440 tell daves from the mutual fund world. One point six 0:07:07.600 --> 0:07:11.360 nine percent. That's that's at that's a lot higher. But 0:07:11.680 --> 0:07:13.880 for a mutual fund, it's not that bad. It's within 0:07:13.960 --> 0:07:17.120 the range of normalcy. But for an ETF one point 0:07:17.120 --> 0:07:20.040 sixty nine would be like, you know, a million dollars. 0:07:20.080 --> 0:07:23.960 I mean again, qqq M, which is tracks then has 0:07:24.000 --> 0:07:26.600 that one hundred is fifteen basis points, and a lot 0:07:26.600 --> 0:07:30.600 of the you know, vanguard funds are under five. It's interesting, though, 0:07:30.960 --> 0:07:34.840 this fund has seven billions, so it clearly has gotten 0:07:34.880 --> 0:07:38.560 some interest. Seven billion is a pretty big size for 0:07:38.640 --> 0:07:41.200 an active mutual fund, and it's taken in some money, 0:07:41.240 --> 0:07:44.000 about half a billion over say the past five years. 0:07:44.400 --> 0:07:46.720 But that's not a ton of money considering this performance. 0:07:46.760 --> 0:07:48.640 So a lot of that seven billion roll came from 0:07:48.720 --> 0:07:51.800 just the performance. So even though this mutual fund had 0:07:51.800 --> 0:07:53.520 had such a nice run, it was the only one 0:07:53.520 --> 0:07:56.200 to beat the cues, it barely got rewarded with flows. 0:07:56.200 --> 0:07:58.480 Whereas Kathy would which she had her run got rewarded 0:07:58.520 --> 0:08:01.040 big time. So you have to wonder if Baron wasn't 0:08:01.040 --> 0:08:04.120 an ETF rapper, maybe it would have gotten more attention. 0:08:05.480 --> 0:08:08.960 You know. Is this part of this sort of difficulty 0:08:09.040 --> 0:08:12.320 of mutual funds having to overcome their vehicle so that 0:08:12.400 --> 0:08:15.040 even if there is one that's really dynamic, maybe some 0:08:15.040 --> 0:08:16.920 people don't even give it a look anymore. I don't know. 0:08:16.960 --> 0:08:19.320 It's just an interesting case study for a lot of reasons. 0:08:19.840 --> 0:08:24.120 Day when you dissected the portfolio, we talked about the concentration. 0:08:24.600 --> 0:08:26.880 What else stood out to you about how they were 0:08:26.880 --> 0:08:27.720 able to achieve this? 0:08:28.560 --> 0:08:30.680 I mean one thing, you know, in addition to the Tesla, 0:08:30.760 --> 0:08:33.559 it's kind of funny. I noticed that they have an 0:08:33.600 --> 0:08:37.560 eight point three percent allocation to SpaceX and then just 0:08:37.600 --> 0:08:40.720 a below one percent allocation to X holding, so they 0:08:40.760 --> 0:08:44.320 seem to be a fan of Elon. It's kind of noteworthy, 0:08:45.559 --> 0:08:47.719 you know. I mean, the Tesla's really been growing the 0:08:47.840 --> 0:08:50.560 last three years or so. They've held it longer than that. 0:08:50.760 --> 0:08:53.360 But the thing that's interesting is they continue to take 0:08:53.520 --> 0:08:56.600 concentrated picks. So if you go back ten years, it's 0:08:56.640 --> 0:08:59.440 a different company that has a huge allocation and so 0:08:59.480 --> 0:09:03.360 they're really just making big bets on companies and you know, 0:09:03.600 --> 0:09:06.120 keeping this really really concentrated portfolio. 0:09:06.960 --> 0:09:09.840 They have some other stocks in here that people probably know, 0:09:09.920 --> 0:09:14.600 like Hyatt MSCI, which is an index company, Veil Resorts, 0:09:15.559 --> 0:09:19.280 Charles Schwab fact Set, which is a Bloomberg competitor, but 0:09:19.640 --> 0:09:21.520 not all big weights. So those are two three percent 0:09:21.559 --> 0:09:24.720 of the portfolio. Like you said, half the fund is 0:09:24.760 --> 0:09:26.760 basically Elon. I mean, they might as well call it 0:09:26.760 --> 0:09:28.920 the Elon Musk fan Club fund. 0:09:31.040 --> 0:09:34.720 This this isn't This fund doesn't have to It's kind 0:09:34.760 --> 0:09:37.040 of a I wouldn't say, go anywhere fund, but it's 0:09:37.080 --> 0:09:39.320 not you know, a large cap. It kind of can 0:09:39.360 --> 0:09:43.840 invest in any companies it wants, basically, So I think 0:09:43.880 --> 0:09:47.319 that's a benefit. It's not really put into one little 0:09:47.360 --> 0:09:50.720 category that it must be one specific benchmark. It kind 0:09:50.720 --> 0:09:54.200 of just invest in what they want and it's worked 0:09:54.200 --> 0:09:54.839 for them so far. 0:09:55.960 --> 0:09:59.040 Interesting to get that SpaceX exposure to you like, that's 0:09:59.080 --> 0:10:03.920 not we wouldn't see that in a ETF easily. I 0:10:03.920 --> 0:10:05.000 don't think, Eric right. 0:10:05.480 --> 0:10:08.160 No, I have to look at this, but I believe it. 0:10:08.240 --> 0:10:11.160 David could correct me. Mutual funds can dabble in private 0:10:11.200 --> 0:10:13.679 equity a little bit. They can't go full on. I 0:10:14.280 --> 0:10:17.240 forget the percentage, but like, there are definitely some Fidelity 0:10:17.280 --> 0:10:19.320 funds that have a little bit of private equity in there, 0:10:19.360 --> 0:10:20.160 like little doses. 0:10:20.960 --> 0:10:23.920 Yeah, no, they their mutual funds can hold private companies. 0:10:24.000 --> 0:10:27.840 Just the interesting thing is every mutual fund will value 0:10:28.080 --> 0:10:31.400 their private companies differently, so they'll place a different value 0:10:31.440 --> 0:10:33.880 than than a different mutual fund will place on the 0:10:33.880 --> 0:10:36.520 same company. So it kind of is hard if you're 0:10:36.520 --> 0:10:39.880 looking at their holding to determine the exact value. So 0:10:39.920 --> 0:10:42.400 you kind of just have to go with what they say. 0:10:43.280 --> 0:10:45.280 But they seem to be a big fan of Elon 0:10:45.360 --> 0:10:46.800 and they're they're going with it right now. 0:10:47.640 --> 0:10:50.839 Okay, so we mentioned Fidelity briefly there. I also want 0:10:50.840 --> 0:10:54.000 to bring that in because you had some interesting research 0:10:54.040 --> 0:10:57.840 about how fidelities active equity managers have performed. How have 0:10:57.880 --> 0:10:58.400 they been doing. 0:10:59.120 --> 0:11:00.600 They've been doing pretty well. 0:11:00.880 --> 0:11:04.080 I do want to mention first though, that actually over 0:11:04.200 --> 0:11:07.839 five years, there were two Fidelity funds that outperform the 0:11:07.880 --> 0:11:12.680 QQQ Fidelity Series Growth Opportunity or Growth Company and Fidelity 0:11:12.720 --> 0:11:16.400 Advisor Growth Opportunities. And so those those two funds were 0:11:16.440 --> 0:11:18.560 able to perform over five years. But if you're looking 0:11:18.600 --> 0:11:23.200 at all fidelities active equity managers, we did a study 0:11:23.200 --> 0:11:26.440 and it looked like about approximately fifty percent have outperformed 0:11:26.440 --> 0:11:30.280 their benchmarks. And that's taken in into account sector funds 0:11:30.280 --> 0:11:32.959 against their primary benchmarks, which are which is the S 0:11:33.000 --> 0:11:36.079 and P five hundred. But then actually when you remove 0:11:36.160 --> 0:11:40.120 the sector funds, their active managers do even better. And 0:11:40.240 --> 0:11:43.040 so they're they're doing pretty well for themselves. And you know, 0:11:43.080 --> 0:11:45.160 it's a big company, and you know, they've got a 0:11:45.160 --> 0:11:47.760 great program where they train analysts from the ground up 0:11:47.960 --> 0:11:51.040 that eventually become their PMS, and so a lot of 0:11:51.040 --> 0:11:53.199 them are doing well. And one thing I did notice 0:11:53.240 --> 0:11:55.320 with a lot of the growth stocks, they had a 0:11:55.320 --> 0:11:58.360 lot of exposure to Navidia and in fact, I think 0:11:58.360 --> 0:12:00.880 they were the third largest holder of Navidio, which is 0:12:00.880 --> 0:12:03.360 I covered in a different note, which is really driven 0:12:03.400 --> 0:12:04.640 a lot of their gains this year. 0:12:05.840 --> 0:12:08.960 Again, latching onto a juggernaut stock seems to be key 0:12:09.160 --> 0:12:12.440 for pms at least in this era, versus finding like 0:12:12.520 --> 0:12:15.760 a value play. Yeah, you're right. They're the third biggest 0:12:15.760 --> 0:12:19.520 holder after Vanguard and black Rock and bigger than State Streets. 0:12:19.559 --> 0:12:22.240 So they definitely overweight. The other thing about Fidelity, it's interesting. 0:12:22.400 --> 0:12:25.480 Obviously they have this famous name for active, but they 0:12:25.480 --> 0:12:27.560 haven't done a ton in the ETF world, and you 0:12:27.600 --> 0:12:30.720 know they're active mutual funds. Some see inflows, some see outflows, 0:12:30.720 --> 0:12:32.920 but where they get most of their flows these days 0:12:33.240 --> 0:12:36.120 is in their index mutual funds, which now have over 0:12:36.200 --> 0:12:40.320 a trillion dollars roll. If Fidelity converted all of its 0:12:40.400 --> 0:12:42.840 index mutual funds into ETFs, they'd be bigger than State 0:12:42.880 --> 0:12:45.920 Street in terms of assets. So they have a lot 0:12:45.960 --> 0:12:48.360 going on. They're just they're a private company. You don't 0:12:48.400 --> 0:12:50.920 hear a ton about them anymore, but I think we're 0:12:50.920 --> 0:12:53.400 gonna hear big things. I think they're gonna try to 0:12:53.440 --> 0:12:55.840 take some of what David found, these managers who are 0:12:55.840 --> 0:12:58.640 bucking the trend. If you have over half being their benchmarks, 0:12:58.840 --> 0:13:00.840 that's way better than the average, because the average about 0:13:00.880 --> 0:13:03.480 a third. They're probably going to try to figure out 0:13:03.480 --> 0:13:06.160 how to move that that brain power and that ip 0:13:06.280 --> 0:13:08.000 into the ETF rapper. I think we're going to see 0:13:08.040 --> 0:13:11.000 that happen over the next ten years from Fidelity and 0:13:11.080 --> 0:13:13.839 many other companies. But Fidelity, with that track record, it 0:13:13.880 --> 0:13:15.760 should help them a lot. I think their price point, 0:13:15.800 --> 0:13:18.480 how they where they put the expense issio will matter. 0:13:18.559 --> 0:13:21.600 But overall, if you can perform that consistently, you're going 0:13:21.640 --> 0:13:22.600 to get looks. 0:13:29.440 --> 0:13:33.160 Okay. So the irony here is obviously you've written a 0:13:33.160 --> 0:13:35.960 book about Jack Bogel and what Jack Bogel did at Vanguard. 0:13:36.600 --> 0:13:42.679 Fidelity not known for indexes or anything touching passive. So 0:13:42.679 --> 0:13:46.800 so what stands out to you, Eric about how Fidelity 0:13:46.840 --> 0:13:48.160 has found some success here. 0:13:49.280 --> 0:13:53.760 I mean, honestly, Bogel relished this, he loved Fidelity used 0:13:53.800 --> 0:13:57.440 to basically, you know, dump on passive back in the day. 0:13:58.400 --> 0:14:01.120 I think I think they're the ones who say, would 0:14:01.120 --> 0:14:03.200 you pay for an average surgeon if you were having 0:14:03.200 --> 0:14:06.760 heart surgery? You know, an indexes like average. And there 0:14:06.840 --> 0:14:08.680 was a lot of pushback on what Bogel was doing 0:14:08.720 --> 0:14:11.320 back in the day, but Fidelity kind of came around 0:14:11.400 --> 0:14:13.480 to their credit. They swallowed their pride and launched a 0:14:13.520 --> 0:14:16.679 series of low cost index funds. And now when Fidelity 0:14:16.679 --> 0:14:19.240 puts out a press release, they say, every single one 0:14:19.240 --> 0:14:21.640 of our index funds is cheaper than the Vanguard equivalent, 0:14:21.720 --> 0:14:23.720 and they are a lot of them are zero to 0:14:23.800 --> 0:14:27.640 one to two basis points but Bogel loved this because 0:14:27.680 --> 0:14:29.480 he wanted to change the whole game, not just how 0:14:29.560 --> 0:14:33.560 Vanguard gets successful. So he would be happy that Fidelity 0:14:33.600 --> 0:14:36.240 is seeing so much success in the low cost index 0:14:36.280 --> 0:14:38.960 funds that they put out. But I think what blows 0:14:39.000 --> 0:14:41.840 me away is that trillion dollars. That is a ton 0:14:41.880 --> 0:14:44.040 of money that no one talks about because it's in 0:14:44.080 --> 0:14:49.240 the mutual fund rapper. Again, if Fidelity was an ETF, 0:14:49.080 --> 0:14:51.920 if all those index mutual funds were ETFs, Fidelity be 0:14:51.960 --> 0:14:54.760 the talk of the town. David, speaking of fees, one 0:14:54.880 --> 0:14:57.080 other note you did that we sort of collaborated on 0:14:57.120 --> 0:15:00.440 to a degree, was you looked at flows and mutual 0:15:00.520 --> 0:15:03.920 funds based on expense ratio buckets, just to see if 0:15:03.920 --> 0:15:07.560 there was a connection between that, because you know what's 0:15:07.560 --> 0:15:10.520 more important now if you're active, your performance or your fee, 0:15:10.720 --> 0:15:12.800 And just tell me what you found when you look 0:15:12.840 --> 0:15:13.040 at that. 0:15:13.880 --> 0:15:18.200 So I separated mutual funds into three feed buckets under 0:15:18.240 --> 0:15:22.440 forty basis points, between forty and eighty basis points, and 0:15:22.560 --> 0:15:26.800 over eighty basis points. And similar to findings that Eric 0:15:26.840 --> 0:15:29.400 and the rest of our team have found on the 0:15:29.400 --> 0:15:32.840 ETF side, if you look at mutual funds under forty 0:15:32.840 --> 0:15:36.080 basis points, they're seeing better flows than the rest of 0:15:37.120 --> 0:15:39.560 you know, than the rest of their counterparts or peers. 0:15:40.000 --> 0:15:43.920 So on the equity side, it's more of less outflows. 0:15:44.320 --> 0:15:48.440 So equity mutual funds are still seeing significant outflows, but 0:15:48.560 --> 0:15:50.960 once you drop down to below forty basis points, the 0:15:51.000 --> 0:15:54.480 outflows is considerably less than the other two buckets. On 0:15:54.520 --> 0:15:57.600 the fixed income side, it was actually seeing a lot 0:15:57.640 --> 0:16:02.320 more inflows. So fixed income mutual fun low with under 0:16:02.320 --> 0:16:05.400 forty basis points are seeing a ton of flows compared 0:16:05.760 --> 0:16:08.720 but once you go over forty or even over eighty, 0:16:09.000 --> 0:16:13.560 it's disastrous on both the equity and the fixed income side. 0:16:13.960 --> 0:16:16.760 And so this completely is intugual with what we've done 0:16:16.800 --> 0:16:20.440 on the ETF side. Research wise, active ETFs are finally 0:16:20.480 --> 0:16:23.480 having their day. It took them ten years, but it 0:16:23.520 --> 0:16:26.280 wasn't until they got cheap and forty basis points appears 0:16:26.280 --> 0:16:29.600 to be some kind of a magic number for advisors 0:16:29.640 --> 0:16:33.000 because ninety five percent of the flows into active ETFs, 0:16:33.280 --> 0:16:37.680 which are massive these days, is into ETFs under forty 0:16:37.720 --> 0:16:40.680 BIPs that are active. It's so only and they only 0:16:40.680 --> 0:16:42.960 make up twenty five percent of the products. So think 0:16:43.000 --> 0:16:45.520 about that that's punching way above its weight. It's very clear. 0:16:46.120 --> 0:16:49.160 My theory on all this, and we've gone I thought 0:16:49.200 --> 0:16:51.400 about this heavily and it's kind of our equals MC 0:16:51.480 --> 0:16:55.280 squared is you have to now beta adjust your fees 0:16:55.320 --> 0:16:58.440 if you're active. So what do I mean by that beta? 0:16:58.480 --> 0:17:00.520 Which is just owning the whole market? And an index 0:17:00.560 --> 0:17:03.720 fund is free. So if you own a lot of beta, 0:17:03.960 --> 0:17:06.639 like I'm talking Apple, Microsoft, if that's the top of 0:17:06.640 --> 0:17:09.160 your portfolio and you're beta heavy, you have to lower 0:17:09.200 --> 0:17:11.400 your fee because an advisor's like, well I can get 0:17:11.400 --> 0:17:13.119 most of that for free, Now why am I going 0:17:13.160 --> 0:17:17.720 to pay you one percent? So as you have a 0:17:17.760 --> 0:17:20.840 fund a manager that's close to the index, if they 0:17:20.880 --> 0:17:23.639 come down and fee and that way they sort of 0:17:23.640 --> 0:17:27.439 beta adjust their fees. I think that in advisors like, well, okay, 0:17:27.640 --> 0:17:31.080 you're just charging me for the active And that's why 0:17:31.160 --> 0:17:32.879 we say you have to be either cheap or shiny 0:17:32.920 --> 0:17:35.760 if you're active. If you want to charge seventy one 0:17:35.840 --> 0:17:38.040 hundred basis points, you've got to be baron funds or arc. 0:17:38.080 --> 0:17:40.560 You got to go hog wild and swing for the 0:17:40.560 --> 0:17:43.239 fences like Babe Ruth and there, because there you can 0:17:43.240 --> 0:17:45.360 actually double or triple the S and P and not 0:17:45.440 --> 0:17:47.720 just beat up by two three percent. But if you're 0:17:47.760 --> 0:17:49.679 one of these managers looking for a little bit of 0:17:49.680 --> 0:17:53.479 excess return beyond the benchmark, I just think that beta 0:17:53.520 --> 0:17:56.600 being free is such a massive innovation that Bogel and 0:17:56.680 --> 0:17:59.840 Vanguard brought along over the last forty years. You have 0:17:59.880 --> 0:18:02.080 to adjust to that, and I think the mutual funds 0:18:02.080 --> 0:18:03.560 show it, and the ETFs really show it. 0:18:03.960 --> 0:18:06.720 Okay, Dave, you got another note where you looked at 0:18:06.880 --> 0:18:12.480 fact a factor, particularly quality and the stock picking in 0:18:12.520 --> 0:18:14.080 small caps. Would you would you learn there? 0:18:14.920 --> 0:18:17.879 Well, it's actually interesting because a lot of the funds 0:18:17.880 --> 0:18:20.600 I noticed that did upperform the QQQ. They took on 0:18:20.680 --> 0:18:23.119 a lot more risk. But this is actually on the 0:18:23.160 --> 0:18:27.359 opposite side. This is a as you know, most small 0:18:27.359 --> 0:18:30.480 caps are underperforming large caps for a big part of 0:18:30.480 --> 0:18:34.000 the year, and but this fund, that's the Ker Small 0:18:34.040 --> 0:18:38.040 Cap Fund, they have a quality factor type approach where 0:18:38.040 --> 0:18:42.480 they're looking for reality quality type companies and so they've 0:18:42.480 --> 0:18:45.080 been able to do that keep their risks down and outperform. 0:18:45.560 --> 0:18:47.679 But one thing I do want to mention about this fund, 0:18:48.040 --> 0:18:51.959 like Barons, it's a concentrated fund. It just instead of 0:18:52.400 --> 0:18:54.959 the high flyers. This is much more of a you know, 0:18:55.400 --> 0:18:57.879 better for companies that would be considered part of the 0:18:57.960 --> 0:19:02.280 quality factor, great balance sheet, it's just really good companies. 0:19:02.320 --> 0:19:06.080 But they're basically making massive bets on a few companies. 0:19:06.480 --> 0:19:09.320 I'm sensing a theme here like concentration and quality. 0:19:09.920 --> 0:19:13.040 Yeah, it's you know, definitely concentration does work, but I 0:19:13.080 --> 0:19:16.720 actually wrote another note that it doesn't always work. It 0:19:17.119 --> 0:19:20.280 really depends on the manager. If a manager has skill 0:19:20.760 --> 0:19:23.400 and they know what they're doing, and they really pick 0:19:23.480 --> 0:19:27.120 great stocks, concentration can do great things. But if you're 0:19:27.200 --> 0:19:31.880 just concentrating a portfolio just for the sake of it, 0:19:31.080 --> 0:19:33.800 it brings on a lot of risk and a lot 0:19:33.800 --> 0:19:35.960 of loss, and a lot of mutual funds of it 0:19:36.160 --> 0:19:39.800 that are just concentrated and really don't have the best 0:19:39.840 --> 0:19:41.880 teams are really faltering. 0:19:42.080 --> 0:19:44.200 Yeah, Joe, when I said, Earl, you got to be 0:19:44.280 --> 0:19:48.520 cheap or shiny. If you're cheap, it's almost less performance sensitive. 0:19:48.560 --> 0:19:51.200 Like you could be a low cost stock picker who 0:19:51.280 --> 0:19:54.600 charges like DFA or Vantis or JP Morgan who charges 0:19:54.680 --> 0:19:57.520 like twenty five basis points to invest in small cat 0:19:57.560 --> 0:20:00.879 value and just the fee alone, you'll get some interest, 0:20:01.600 --> 0:20:05.120 but if your high fee and high concentration it's not enough, 0:20:05.160 --> 0:20:08.000 you then have to perform. So I think ARC is 0:20:08.040 --> 0:20:11.080 a great example. Some thematic ETFs are good examples of that, 0:20:11.440 --> 0:20:14.840 and this kar is a good example. Also. I think 0:20:14.880 --> 0:20:17.720 that in the small cap space that's an interesting spot 0:20:17.760 --> 0:20:19.639 for active because if you look at the number of 0:20:19.680 --> 0:20:22.600 analysts that cover like certain large cap stocks like Amazon, 0:20:22.960 --> 0:20:25.480 it's in like the fifties, right, And then you get 0:20:25.480 --> 0:20:27.560 down to small caps, some stocks aren't covered at all 0:20:27.800 --> 0:20:31.040 or barely, so there's probably more opportunity for someone to 0:20:31.080 --> 0:20:35.200 find something novel. Right. There's less information on all these 0:20:35.240 --> 0:20:39.320 companies that everybody knows, so I'm not totally surprised that 0:20:39.400 --> 0:20:41.600 this manager found a niche down here. But again, this 0:20:41.680 --> 0:20:43.880 is why David was hired, was to sort of dig 0:20:43.920 --> 0:20:48.920 into all these managers. Again, there's almost double as many 0:20:48.960 --> 0:20:51.879 mutual funds as ETFs, you know, and to find some 0:20:52.000 --> 0:20:53.639 of the diamonds in the rough. And I think this 0:20:53.680 --> 0:20:58.040 is a good example speaking of diamonds in the rough 0:20:58.080 --> 0:21:01.080 and finding exotic species. This last one is a good 0:21:01.400 --> 0:21:03.600