Lesson #1: The less you pay in fees, the more you get to keep"Management fees are one of the few things you can control, so control them," Conway writes. For example, the chart below from the SEC's Office of Investor Education and Advocacy shows how paying a 1% annual management fee can impact an initial $100,000 portfolio. Over 20 years and factoring in a 4% annual return, the investor loses out on $40,000 assuming he or she invested the money subtracted for fees.
Conway has often focused on costs as he has covered ETFs, which are known for their low fees and indexed approach. So, he took notice when Covestor launched passively managed Core Portfolios of ETFs earlier this summer that don't charge any management fees. They are designed to let investors track the market while paying as little as possible, as to benefit the investor as much as possible. Using technology already in place for Covestor’s active investing strategies, the company leveraged the lower overhead costs of streamlined trade replication (along with the know-how of the intelligent humans on the Investment Management Team) to produce such an investment product without the need to charge a management fee. "Covestor's program entails no management fee, just the underlying ETF expense ratios, which are measured in fractions of a percentage point, and trading commissions, which the firm estimates to be $20 a year," Conway wrote in June. Investing disruption, achieved.
Lesson #2: Active and passive investing work together
Going back to Conway's farewell column, he noted there's no "holy writ" for passive investing when investors simply track the market."What will your passive ETF do in the next bubble? It’ll buy the bubble; that’s what passive ETFs do," he said. "Index-based investing is great most of the time. But active managers, for all of their challenges, can choose what to buy and when." Indeed, the reality is that active and passive investment strategies can work most effectively together. Passive, index-tracking investments such as ETFs can be used to achieve broadly diversified exposure to entire asset classes at very low cost. These are sometimes called "core" investments. Then, active investment strategies – “satellites” – that attempt to outperform the market with security selection and other techniques can be added to the mix. Combining passive and active strategies is known as a Core-Satellite approach, which can lower overall portfolio volatility and give investors a better chance to potentially outperform the market. In the Core, investors mirror the market while keeping fees to a bare minimum. The Satellite component taps active strategies to generate potential outperformance. This way, investors are combining the best of both worlds. The mix of core and satellite within one’s portfolio would be usually dependent on stage of life, investing approach, or any number of personal factors. Regardless, it gives investors a way to create a singular, aligned investing strategy which works harmoniously. Newer investing platforms offer investors a way to create this entire strategy within one account, such as what the new Core Portfolios created within the Covestor platform. Brendan’s insights at Barron’s will indeed be missed, but we wish him the best in his new endeavor. —
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