One part of the digital investment management story is the shortening of the value chain in wealth and asset management. As active asset managers (fund manufacturers that pick investments to create alpha) face compression driven by asset flows into passive products -- indexes packaged in ETFs -- one answer form asset managers have been to build out their own distribution channel, where they control asset allocations. This is why roboadvisors have primarily gained traction with manufacturers (revenue sale) and not distributors (efficiency sale). So let's highlight a few relevant data points.
First, Autonomous asset management analyst Patrick Davitt just put together our October sector data, which is highlighted below. Looking at over 9,200 active funds and $9.3 trillion in assets, a full 63% under-performed their benchmark in October. Out-performance in a down-market is supposed to be the reason active management exists! As for 2017, there was a 50% chance of out-performance, a coin flip on whether it's better to hold an active fund or just the index. In terms of actual assets, regardless of market environment, about $20-40 billion is flowing out of active funds and into passive funds. Hard to find a more clear example of a secular shift. Part of this story of course isn't fair to fund managers. When bad things happen in an active fund, you can blame and fire the fund; but in a passive index, you blame the market and hope it recovers. This is a permanent, psychological disadvantage.
The second part of the story is the fantastic Backend Benchmarking Robo Report (link below). The analysis follows the performance of 24 roboadvisors, with several over a 2 year horizon, which we partly highlight. Notably -- Merrill, TIAA, Zack's and Morgan Stanley are all listed as incumbent robos. Our estimate of $600 billion in the strategy feels increasingly correct. In the charts below you'll see 2 treatments of the data: (1) annualized returns vs standard deviation, sized by Sharpe ratio and colored by incumbent/startup status; and (2) an upside and downside capture ratio plot, which shows how good an allocation is at capturing alpha during market momentum. In the first analysis, incumbents like FidelityGo and Vanguard look stronger than the independents in terms of the unit of return per unit of volatility. In the capture category, TD Ameritrade, Personal Capital and Wealthfront stand out. Merrill Edge is the worst on capture, and FutureAdvisor has the worst 2-year performance. What's most telling perhaps is that 77% under-performed their benchmark (as set by this third party) in Q3, and 82% under-performed over a 2 year period. Hard to fire the whole market.