Rise of Indexes Threatens to Eclipse Their Creators

Index providers have won big in the great migration from high-priced active management to low-cost index funds. But their fortunes are set to turn.

The same trend that brought index providers to prominence is now coming for their profits: Investors are in no mood to pay fees. Investors plowed a net $2.5 trillion into mutual funds and ETFs that charge 0.2 percent a year or less from 2007 to 2016, according to Broadridge, which tracks data from 80,000 funds globally. That’s more than twice what they invested in all other funds combined.

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Insurrection in Excel Nation

I have a feeling that chief financial officers will miss Excel.

The Wall Street Journal reported last week that some CFOs are telling their employees to stop using Microsoft Corp.’s Excel spreadsheets for “financial planning, analysis and reporting.”

Complaints about Excel are as old as the program itself. Some of those complaints are legitimate, and Microsoft should pay heed. Until this summer, for example, Excel didn’t allow users to collaborate, a feature that Google Sheets made available free a long time ago.

Other complaints are misguided, however. Adobe Inc.’s CFO Mark Garrett told the Journal that he doesn’t want “financial planning people spending their time importing and exporting and manipulating data.” Instead, he wants them to focus on what the data means.

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Bezos Is the Rich King of a Slippery Hill

Jeff Bezos is the world’s richest person. But he shouldn’t get too comfortable on the throne just yet.

Bezos rode a post-earnings rally in Amazon.com Inc.’s shares on Friday to take the top spot in the Bloomberg Billionaires Index. It wasn’t the first time. Bezos was king for a brief moment on July 27, but Amazon shares slid before the market closed and Bezos ended the day in second place.

The top spot on the Forbes 400 — an annual list of the richest Americans  — has been held by just two people for the last 25 years: Bill Gates and Warren Buffett. Gates made his first appearance at No. 1 in 1992. Buffett made his first appearance a year later.

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The Fault in Morningstar’s Stars

It’s time for Morningstar to scrap its fund ratings.

The Wall Street Journal took issue with Morningstar’s rating system for mutual funds on Wednesday. Morningstar awards funds up to five stars based on their risk-adjusted performance relative to peers.

The problem, according to the Journal, is that investors assume erroneously that “the number of stars awarded to a mutual fund is a good guide to its future performance.” Stephen Wendel, Morningstar’s head of behavioral science, agrees that “Morningstar’s star ratings for funds are clearly used in the industry to imply that funds that performed well in the past will do so in the future.”

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Fidelity’s Fee Fix Comes Up Short

As investors lose faith in active managers, Fidelity Investments CEO Abby Johnson is trying to stem their flight to index funds. I doubt her plan will work.

Johnson, head of the money manager that built its name and fortune on traditional active management, wrote in the Financial Times last week that the growth in index funds “in part reflects investors’ desire for value and clarity around what they are paying for, and active managers have to respond.”

Here’s the problem — active managers fail to beat their benchmarks primarily because their fees are too high. If managers want to deliver more value to investors, the easiest way is to lower their fees.

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Washington Is Coming for Google and Facebook Profits

The regulators are coming for Google and Facebook. Company executives have taken note, and investors should, too.

The latest call for regulation came this week, when, as Bloomberg News reported on Tuesday, Google parent Alphabet Inc. disclosed that “Russian-linked accounts used its advertising network to interfere with the 2016 presidential election.” That follows recent disclosures from Facebook Inc. that it was paid by Russians for election-related ads.

Regulators didn’t need any more reasons to target Google and Facebook. As my Gadfly colleague Shira Ovide recently pointed out, they are the new media barons, wielding “enormous power over what news and entertainment get made.” They’re also the second- and fourth-largest U.S. companies by market capitalization, respectively. It’s hard to see why they should be exempt from an otherwise highly regulated industry.

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An Investing Scorecard With a Blank Space

S&P Dow Jones Indices recently released its biannual SPIVA Scorecard, which compares active and passive investments. I suspect few investors noticed and even fewer cared.

Investors have long accepted what the scorecard unfailingly shows — that the vast majority of active fund managers lose to their benchmarks net of fees. The latest scorecard doesn’t alter that conclusion. Only 15 percent of U.S. equity funds and 9 percent of international ones beat their benchmarks over the last 15 years through June. The numbers are similar for fixed-income managers.

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Picking Stocks Is Hard. It’s Harder With Growth.

Picking stocks is famously difficult. But just how difficult is one of the oldest arguments in finance.

New York Times columnist Jeff Sommer reopened the debate last week with a piece describing a recent study by an Arizona State University business professor, Hendrik Bessembinder.

Bessembinder looked at the performance of publicly traded stocks in the U.S. from 1926 to 2016 and discovered that most of them failed to keep up with one-month Treasury bills. In fact, Bessembinder found that only 4 percent of stocks accounted for all the net wealth created by the market during the period, and 50 of those stocks accounted for 40 percent of that net wealth.

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