Thread by @passivefool

Today in re-learning. Most of active fund returns can be explained by factor exposures - Value, Quality, Momentum, Low-Volatility etc.

msci.com/documents/1019…

You can assemble these funds for less than 50-60bps. You can replace all those costly, mostly useless discretionary active funds which most likely are doing what a smart beta ETF (UGG, disgusting term) does and charging on an average 1.2%-1.5%.

Anybody who predicts things is either lying or making a fool oh himself. So I'll make a fool of myself. Globally smart beta ETFs have become replacements for traditional active funds. I predict that this trend will only pick up pace over time.

In India, we just have ETFs for factors and a just one proper fund - DSP Quant Fund. But if you still want to get rid of you active funds, these ETFs will do the trick with some pain in the ass i.e. liquidity issues.

Again, I'll make a fool of myself and predict that this trend will catch fire in India too. I don't think the existing AMCs have an incentive to launch many of these funds because the margins are active funds are so goddamn juicy. But this resistance will slowly fade away.

Partly because they can make a little more on these smart beta funds/ETFs than a plain vanilla Nifty index funds. Beta is dirt cheap at 10bps, smart beta still has 30-60bps. So nice way to make some money at least.

Traditional benchmark hugging active which by my guesstimate is 70%+ of what we see is a dead man walking. I give it another recession for the shift toward indexing and smart beta to take hold in India.

All the traditional rent-seeking fund management is dead, it's just that AMCs have realized it yet.

The Barbarians (good ones - index, smart beta) are at the gates and they will knock them down.