Bloomberg Lu Wang came out with a great story this morning. which chronicles the challenges active managers face in an environment where a few mega-cap companies are driving the index to record levels.
The basic problem is basic math: since the "Magnificent Seven" stocks represent about 30% of the weight in the S&P 500 and investors are prevented from holding those stocks in this proportion, you can't keep up with the index. reference equaling the reference index. Now, of course, mutual fund managers could fill their funds with ETFs that track the S&P 500. But that's not why investors pay the increased fees charged by active funds.
What is at stake, specifically, is the Investment Company Act of 1940which governs the behavior of actively managed stock funds.
As Morningstar's Robby Greengold wrote last year, the law "means that an allocation of 5% or more to a single security is uncomfortably large; to gain diversified status, a mutual fund must limit the aggregate share of such positions to 25%." % of its assets."
In article 5, specifically, the law establishes:
"Diversified company" means a management company that meets the following requirements: At least 75 percent of the value of its total assets is represented by cash and cash items (including accounts receivable), government securities, securities of other investment companies and other values. For the purposes of this calculation, it is limited with respect to any issuer to an amount not exceeding 5 percent of the value of the total assets of such management company and not more than 10 percent of the outstanding voting securities of said society. editor.
Basically, your fund should be mostly liquid, the investments widely distributed, and remain mostly passive when it comes to managing the investee companies. And this latest article offers another notable advantage for the active fund management community.
Most investors who use mutual funds to allocate capital are probably not looking to become activist investors. But, if they were, these rules exclude this possible strategy. Another way the investing world is a treacherous place for stock pickers.
