R2| Monday, October 7, 2019 THE WALL STREET JOURNAL.
and separately managed accounts. But the
percentages don’t apply to the individual
stocks and bonds chosen by the clients or
their advisers.
Bing Waldert, managing director in
charge of research at Cerulli, says the big-
firm brokers have raised their passive per-
centage “significantly” from much lower
levels 10 to 15 years ago. Indeed, for 2018,
the big-firm passive percentage was even
lowerat24%.
While they are becoming more comfort-
able putting clients’ U.S. stock-market assets
in index funds, Mr. Waldert says, they still
prefer active funds for international stocks,
bonds and “alternative” investments.
Some fund categories, like municipal
bonds, are still predominantly active. Al-
ternatives carry even higher fees, more
than double the average active fund.Commissions’ influence
Many brokers still get paid with commis-
sions, and 28% of all active mutual funds
sold to individual investors can still gen-
erate commissions, according to data
from ISS Market Intelligence, a money-
management research division of Institu-
tional Shareholder Services. Fewer index
funds are generally sold with commissions.
Registered investment advisers, by
contrast, are mainly paid via an annual
fee, usually a percentage of client assets.
Cerulli says commissions represent 32%
of big-firm brokers’ pay, and even more at
40% to 41% for brokers at smaller firms—
but only 5% of independent advisers’ pay.
While many big-firm brokers paid by
commission aren’t held to fiduciary stan-
dards, those paid by annual fees are con-
sidered fiduciaries. The Obama adminis-
tration sought to hold brokers advising
on retirement assets to a fiduciary stan-
dard, but the Trump administration has
instead adopted a new yardstick, effec-
tive next year, requiring all brokers to
act in the “best interest” of clients.
Wall Street advocates say it is per-
fectly natural for brokers to favor actively
managed funds at times. “Brokers are
trying to provide added value,” says regu-
latory and capital-markets lawyer Mark
Knoll, whose firm, Bressler Amery &ContinuedfromthepriorpageJOURNAL REPORT | INVESTING IN FUNDS & ETFS
B
eing a multiple—and
repeat—winner isn’t a
new experience for Joe
Hudepohl.
At the 1992 Olym-
pics in Barcelona, Mr.
Hudepohl earned gold and bronze
medals in the 100- and 200-meter
freestyle relays. Four years later, he
won another gold in Atlanta.
In similar fashion, Mr. Hudepohl
just captured the “silver” and
“bronze” medals in the latest round
of The Wall Street Journal’s quarterly
Winners’ Circle ranking of top mu-
tual-fund managers. And this is the
second consecutive round in which he
finished near the top of the rankings.
The gold medalists for the latest
round are the co-managers ofAkre
Focus Fund (AKRIX), Charles
“Chuck” Akre and John Neff. The I
share class of their fund finished the
quarter with a 12-month return of
20%. This year marks the 30th anni-
versary of Mr. Akre’s founding of
Akre Capital Management, and the
10th anniversary of Mr. Neff’s arrival.
To reach the podium in the Jour-
nal’s contest, managers had to be run-
ning diversified U.S.-stock funds withtrack records of at least three years
and assets of at least $50 million for
the 12 months ended Sept. 30. (Under
the rules, no global funds, sector
funds, quantitative funds or leveraged
funds qualify. As always, the contest
results aren’t intended to be a “buy”
list, since a 12-month performance is
a combination of skill and luck.)
Mr. Hudepohl captured his second-
and third-place finishes for this latest
period as the manager of two funds.
Eaton Vance Atlanta Capital Focused
Growth Fund(EILGX) ended up in
second place (up from his third-place
finish in the second quarter) with a 12-
month return of 19.2% for its I share
class. Meanwhile, the A share class of
Calvert Equityfund (CSIEX) that he
and Atlanta Capital Management Corp.
also oversee as a subadviser wrapped
up the period with a gain of 18.7%.
Being able to demonstrate exper-
tise in either swimming or the mar-
ket “takes a long time, and a lot of
practice,” Mr. Hudepohl says. Both
also offer the chance to demonstrate
skill. “I don’t need the crowd, or the
pat on the back, or whatever,” he
adds. “I like to win.”
Mr. Neff is unrelated to the late
fund manager of the same name,
who ran Vanguard’s Windsor Fund.ners prefers to hang on to their
holdings for years or even decades.
One of the Akre fund’s best-per-
forming holdings—and its largest
holding—isAmerican TowerCorp., a
dominant player in the global telecom
industry as an owner-operator of cell-
phone towers. While the stock traded
at around $36 at its launch in 2009,
today it stands at about $225, up
from $142 over the past 12 months.
It is easy to understand the stock’s
appeal, Mr. Neff says, “once you un-
derstand that there are economic and
zoning reasons not to build new tow-
ers too close to each other, making
each [existing] tower a geospatial
monopoly.” The stock is also is a core
holding for Mr. Hudepohl’s funds.
Sometimes when adding a com-
pany to the portfolio, Mr. Akre says,
it’s a bet on the management team’s
thought process. That has been the
case in conglomerate-style companies
in which the fund has invested, such
as Warren Buffett’sBerkshire Hatha-
way,Roper TechnologiesInc. and
Canada’sConstellation SoftwareInc.
“We make judgments about them
from personal interactions, and based
on what they say and write,” Mr.
Akre says. “We quiz them about their
thinking about reinvestment andBYSUZANNEMCGEEwhat their returns on asset purchases
have been.”
For now, the Akre fund is holding
on to cash that has flowed in over
the past year or so. Cash levels stood
at a large 16.4% of the fund’s assets
midyear, and have crept “incremen-
tally” higher since. The two men in-
sist they aren’t bearish; it’s just that
while “we are letting the cash build
up, we are hard pressed in today’s
markets to find valuations that are
compelling enough to put that cash
to work,” Mr. Neff says.
Depending on the share class, the
winning funds in the contest might
look costly to some investors. For ex-
ample, Morningstar deems as “high”
the fees levied on the I share class of
Akre Focus, which has an expense ra-
tio of 1.05%. (I shares are available to
institutional investors, including fi-
nancial advisers operating on behalf
of their individual clients.)Ms. McGeeis a writer in
New England. She can be reached
[email protected]. JARED LEEDS; GETTY IMAGES; AKRE CAPITAL“Chuck jokes that he thought he was
hiring the legendary John Neff when
he recruited me,” quips Mr. Neff.
Messrs. Neff, Akre and Hudepohl
do share some of the late star man-
ager’s discipline and focus. Like theWindsor Fund legend, all three em-
phasize getting well acquainted with
the companies in which they invest,
and focusing on fundamentals. Un-
like some fast-moving investors,
however, this new generation of win-Score at the Quarter
U.S.-stock funds registered only their
third negative quarter in the past 11.
Average total return, U.S. diversified
funds.Source: Lipper2017 ’18 ’19–0.4 –0.3–15–10–5051015%WINNERS:Joe Hudepohl, left,
and flanked by teammates after
winning gold in Atlanta in 1996.
Right: Akre’s John Neff, Chuck Akre.WINNERS’ CIRCLE
Give us our bonds!
Thatseemedtobethecryoffundinvestorsinthe
third quarter. Despite the resilience of the stock market—
and the healthy gains registered by stock funds so far in
2019—wary investors continued to send billions of dol-
lars to the relative safety of bond funds.
U.S.-stock funds posted a slight decline for the quar-
ter of 0.03% but remain up 18.3% for the year to date,
according to Thomson Reuters Lipper data. International-
stock funds posted an average decline of 1.4%, to trim
their year-to-date gain to 12.8%.
Bond funds rose. Funds focusing on intermediate-ma-
turity, investment-grade
debt (the most common
type of bond fund)
posted an average total
return of 2.1% for the
quarter, pushing the
year-to-date gain to 8.5%.
That is no surprise as
the Federal Reserve and
European Central Bank
cut interest rates, says
Scott Ladner, chief in-
vestment officer with
Horizon Investments in
Charlotte, N.C. “We’re in a central-bank easing cycle. That
is not a bad time to have exposure to bonds,” he says.
If there’s anything that could rapidly reverse the
bond-fund popularity, it would be fiscal stimulus out of
Germany, he says—“When a government even hints
there might be a fiscal stimulus, equity screams [up-
ward] and rates go up”—or anything positive as far as
trade with China.
The flow of investor cash was solidly toward bonds.
Investors sent a net $100.1 billion to bond-focused mu-
tual funds and exchange-traded funds in the third quar-
ter, according to Investment Company Institute esti-
mates. In contrast, investors stepped back from stocks.
They pulled a net $36.9 billion from U.S.-stock funds and
$23.7 billion from international-stock funds, according to
the estimates.
In another sign of investors’ wariness about the mar-
kets and political uncertainty, gold-focused funds have
had a spectacular year. Gold funds were up 4.3% on aver-
age in the third quarter, to push the year-to-date gain to
25%—drubbing all the other major Lipper categories.
Gold funds, which are volatile, fell 15.3% last year.Third-quarter 2019 flow of
investor cash by fund type,
in billions*
U.S.
stocksIntl.
stocks Bonds–$36.9 –$23.7 $100.1
*estimated mutual-fund/ETF flows
through 9/25
Source: Investment Company InstituteFOLLOW THE MONEY
Mr. Poweris a Wall Street Journal news editor in
South Brunswick, N.J. Email him at
[email protected].Ross, represents Wall Street firms.
“They may recognize that it’s tough to
beat the index, but many will look to do
better” if that matches the client’s goals
and risk tolerance, Mr. Knoll says. “Maybe
you have a bigger appetite for risk and you
want a broker who’s going to help you try
to find that diamond-in-the-rough stock.”
Doug Black, founder of SpringReef LLC,
which evaluates financial advisers for
wealthy families and nonprofits, says the
big firms’ active tilt partly reflects a legacy
Wall Street sales culture where brokers
have “built relationships with their clients
around these outside managers.” He also
notes that higher-fee active managers often
make “pay to play” payments to big firms
for access to information about their bro-
kers and clients.
Indeed, the two largest Wall Street
firms, Morgan Stanley and Merrill, cur-
tailed their brokers’ use of mutual funds
from the largest index sponsor,Vanguard
Group, a few years ago, after Vanguardbalked at making such broker-access pay-
ments to the two firms. (Vanguard de-
clined to comment.)
None of the four Wall Street firms
would say what percentage of their client-
fund assets are in passive vehicles, or com-
ment directly on the Cerulli data. Wells
Fargo says its advisers offer a mix of active
and passive funds “designed for each cli-
ent’s unique needs.”
Large brokers acknowledge the passive
tsunami, but still argue for active. “While
passive investing has grown in popularity
over the last few years, Morgan Stanley
Wealth Management has found that in
many cases active management may help
investors improve their risk-adjusted re-
turns,” especially in periods of market
stress, Morgan Stanley investment strate-
gist Dan Hunt said in a March article on
Morgan’s website.
Addressing the Cerulli data, Wall Street
executives generally don’t dispute the re-
ported gap. Instead, they say active funds
can play a key role in successful strate-
gies. Using more passive funds doesn’t by
itself show greater adherence to fiduciary
standards, they add.
Jennifer Ellison, an independent ad-
viser at Bingham, Osborn & Scarborough
in San Francisco, sees about 10 portfo-
lios a year of new clients with accounts
formerly at big Wall Street firms. Those
accounts commonly have just 10% to 25%
in passive funds, she says, with the re-
mainder allocated to outside managers
and funds with commissions and market-
ing fees “which compensate the adviser.”Embracing ‘passive’
Another fund-industry consultant, Broad-
ridge Financial Solutions, found a similar
pattern in which independent advisers put
more client funds into passive vehicles
than big-firm brokers by a margin of more
than 2 to 1 in the 18 months ended in
June 2019. Data from ISS Market Intelli-
gence also shows brokers use passive less
often than registered investment advisers.
Dr. Boyson, the Northeastern finance
professor, notes that some brokers might
fear losing a client who is put in a pas-
sively managed Vanguard fund, especially
since Vanguard has grown more aggres-
sive in pitching its own advisory service.
“If the client sees a Vanguard fund, they
might think, ‘Oh, I can just go to Van-
guard and save a lot of money.’ ”Mr. Smith,a former financial reporter for
The Wall Street Journal, is a writer in New
York. Email him [email protected].Wall Street
Brokers Missed the
Index-Fund Memo
Wall Street’s Active Tilt
Adviser-reported 2019 allocation to active
and passive productsWirehouses* Independent RIAs†*Wirehouse refers to four of the largest national broker-dealers with
a major Wall Street presence—Morgan Stanley, the Merrill unit of
Bank of America, UBS and Wells Fargo
†Registered investment advisers
Source: Cerulli Associates surveysActively managed funds or
separate accounts
Actively managed ETFs
Passively managed index mutual funds
Passively managed ETFs58%13%6%23%43%12%25%20%QUARTERLY MONITOR|WILLIAM POWERBond Funds
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Attract Cash
A Silver Medal...for Stock Picking This Time
Olympic medalist at Eaton Vance shines in our manager ranking; Akre Focus Fund wins with a 20% 12-month gain