March 1, 2022
Ten years ago, in March of 2012, the world’s largest mutual fund cloned itself as an ETF. It occasioned a small amount of business media attention at the time, but in hindsight, it was the event that changed everything.
Many of you today do not even know what a mutual fund is (or how to write in cursive or dial a phone with your finger, but that’s another story). But once upon a time, the mutual fund was the center of the financial universe and the dominant vehicle for retail investors. Before President @MeghanMcCainDC was sworn in and before the Facebook-Google naval battle that tragically claimed the lives of thousands of our young programmers, the mutual fund was King.
Prior to the Crash of 1929, almost one hundred years ago, there were around 700 closed-end funds and only a handful of mutual funds. But closed-end funds were leveraged with debt and had to report their holdings each night. The majority of these early funds were wiped out in the sell-off. And when the smoke cleared, it was the open-end mutual fund that took the baton from their debilitated closed-end cousins.
And that new pecking order stood for seven decades without a challenger in sight, as retirement vehicles like 401ks blossomed. Exchange traded funds (ETFs), which came to prominence in the late 1990’s, grew their assets under management quickly, but mainly as passive index vehicles; very few actively-managed ETFs could raise any money at all.
But one fund family, Pacific Investment Management Co. (PIMCO) saw an inevitability that the other mutual funds were slow to accept. They saw that as brokers morphed into advisers, broker-sold products like mutual funds would eventually lose assets by attrition (there once was an old saying that “mutual funds are sold, ETFs are bought”). Pimco recognized that what people hated most about their mutual funds were their high expense ratios, the 12-b1 marketing fees and the inflexibility of a product that could not be purchased or liquidated until after the market close each day.
And so rather than react to that eventuality when the time came, Pimco helped usher in that new era with the launch of its flagship Total Return actively-managed ETF. It was a nimbler version of its ubiquitous $300 billion Total Return mutual fund (PTTRX). Its March 1, 2012 launch under the ticker symbol TRXT would henceforth be recognized as the Shot Heard ‘Round Boston, the birthplace and epicenter of the traditional fund complex.
Within one quarter, financial advisers and pension fund managers realized that the small basis point cost difference between the Total Return Institutional Class fund and the Total Return ETF was de minimis (48 basis points versus 52 basis points). And tens of billions of assets flowed from the former to the latter in an unstoppable torrent. After another quarter had gone by, the retail holders of Total Return A and C shares (which carry extra fees) rebelled against their brokers and demanded a switch, especially when the performance gap turned out also to be almost nonexistent.
The total sacking of the Mutual Fund Empire certainly didn’t happen overnight. It took Jeffery Gundlach’s DoubleLine two years to launch his competing Total Return ETF into the marketplace, T. Rowe Price (TROW) and Janus (JNS) began cloning their top shelf funds shortly thereafter. War erupted nationwide across the asset management landscape with two trillion dollars and the soul of the industry up for grabs. There were skirmishes between custodian and transfer agent, there was the Creation-Redemption Unit Massacre of October 2014, the TIAA-CREF versus Putnam Bloodbath and the Battle of the Pension Fund during which the Teachers Union mercenaries were told to “do their worst” (they happily obliged, pelting Wharton MBAs with rotten fruit outside of an investment committee meeting at the Charles Hotel in Harvard Square).
It wasn’t until the barrier for ETFs into 401(k) plans was finally overrun in 2015 that the Provisional Mutual Fund Government in Exile (PMFGE) finally conceded under a shady tree in Zuccotti Park. The surviving fund families buried their dead index funds and sector funds and converted the remaining active strategies to the ETF wrapper.
Most people in the fund management industry don’t like to discuss those days. The fees charged now are significantly less and profitability will never be what it once was during that bygone era. Fidelity decamped from Boston, opting for a more decentralized presence. The Jack Bogle-worshipping old guard alliance promptly slipped into hiding so as not to face a war crimes tribunal for the atrocities they committed in the spring of ‘17.
The mutual fund industry died from a thousand cuts — but it was Pimco who drew the first blade in 2012.
