Twenty-five years ago, I was fortunate enough to have been on the ground floor when the ‘experiment’ known as Sabermetrics reshaped the Oakland A’s, and eventually professional baseball. I saw firsthand how our new data-driven paradigm impacted everything from player evaluation and development to required skill sets for executives — and even competitive balance.
One truth I’ve learned is that industry transformation is not inevitable. Technological breakthroughs are not necessarily destined to succeed. Industry inertia, financial incentives, culture, and personalities create structural resistance to change. It comes down to individuals with vision and passion — and the determination to weather blowback — who ultimately champion transformational changes.
A quarter century ago, baseball’s traditionalists initially dug in, but they eventually did adapt to the changes.
Within the investment world, I have no doubt that inertia will be just as resilient a foe as that industry grapples with the technological and philosophical advances described below. Time will tell if the industry shrugs it off or adapts. The question to me remains — who will emerge as the true leaders of change?
Billy Beane
For most industries, transformative innovation is an ever-present reality. Within the staid world of investing, true innovation – the type that alters investor behavior and competitive balance – is rare. But – spoiler alert – it might be on the cusp of occurring today for the much-maligned active investment management industry. Ironically, the emergence of active ETFs (combined with an advanced approach to active management) might be the Trojan Horse that saves active management.
Let’s start with a brief history lesson on the transformative impact of passive investing. In the mid-1970’s, Jack Bogle and Vanguard popularized index funds in a world dominated by active managers. Passive accelerated in the 1990s, in part, through the introduction of ETFs. But the real tipping point occurred in 2009 when BlackRock, led by Larry Fink, acquired Barclays Global Investors and iShares, which had a 50 percent market share of index-based ETFs.
Many would rightly argue that BlackRock’s acquisition of iShares has been the industry’s most-significant deal. At the time, active and passive managers were pitted in a fierce battle for supremacy. Active was the incumbent, passive the challenger — and Larry Fink’s BlackRock was firmly in the former camp. But in one fell swoop he tipped the scales when he broke ranks to acquire iShares, essentially validating the legitimacy of passive investing. The industry was forever changed.
In the ensuing years, low fee passive has supplanted active as the dominant investment theme. Active equity funds have seen 16 consecutive years of outflows, exceeding $3 trillion. In 2024 alone, active had $550 billion in outflows. Importantly, investors have benefited. The shift toward passive has cut overall fund fees in half, transferring billions from investment firms to investors.
But fund fees are nearing a floor, with more than 100 ETFs charging less than 0.05 percent per year. Fidelity Investments’ S&P 500 mutual fund, which has $600 billion in assets, is priced at 0.015 percent, and dozens of ETFs and funds carry no fee at all. So where does the industry go from here? What will be the source of the next wave of innovation?
Clearly, improved performance is an age-old aspirational goal of the active management industry – one that has proven elusive. But in a sign of the times – namely leveraging advanced technology and drawing inspiration from other industries — there is an emerging approach to active management that has demonstrated its ability to outperform. It is built on advanced mathematics and proven research — and already has buy-in from industry powerhouses like Fidelity, Goldman Sachs Asset Management, Citadel, and Steve Cohen’s Point72. If it lives up to its early potential, it can be as disruptive to active management as was Larry Fink’s acquisition of iShares.
The common themes across these firms’ approaches are to capture the highest conviction stock picks — ‘best ideas’ — from multiple managers, and then mathematically identify stocks that have the highest consensus agreement. This next-generation approach to active management can be thought of as the mathematical version of the ‘Wisdom of Experts.’
While each firm listed above uses its own brand name to describe its products, for convenience, we will refer to the category as High Conviction Investing – Phase II, or HC2.0 for short.
Fidelity’s ETF suite is branded Fidelity Fundamental, Goldman Sachs’ ETF uses the ticker VIP, and Ken Griffin refers to Citadel’s approach as Center Book. Firms from France and Canada have launched products, and the technology firm Turing Technology licenses its proprietary technology to enable clients to participate. Regardless of the name, verifiable HC2.0 assets are currently at least $5.3 billion, and growing rapidly. Overall assets have reached an astounding $1.2 billion in the past 90 days.
Why is this attempt to drive improved performance different? Follow the science. Research has long shown that fund managers’ highest conviction stock picks are the only reliable source of stock selection ‘alpha.’ With HC2.0, machine learning concepts elevate these best ideas through the mathematics of Ensemble Methods, which is broadly used to improve predictive accuracy by applying consensus agreement across multiple so-called forecasting engines, such as facial recognition or cancer diagnosis. The breakthrough for HC2.0 is the recognition that mutual funds are also predictive engines, with managers identifying stocks that they expect to outperform the market.
Finally, the performance potential of HC2.0 is not just a concept. In 2024, researchers published a white paper (which was verified by an independent third party) that included the largest study to date of HC2.0. The research showed that HC2.0 portfolios outperformed their benchmarks in 74 percent of rolling one-year periods, with an average annual excess return of 5.3 percent.
Competitive balance in the investment industry has effectively calcified for a decade. BlackRock and Vanguard have held the industry’s top two positions since 2012, due in large part to their dominance in passive investing. This is unlikely to shift without a change in the rules of engagement: True structural change is needed to create renewed value for investors.
For the active management industry, a door is opening with the emergence of actively managed ETFs. Simply repackaging traditional funds as active ETFs is nothing more than a new coat of paint on a jalopy, and they won’t stop the hemorrhaging from active funds. But if the investment engine is upgraded to HC2.0, and packaged in an active ETF, then you have the potential for explosive commercial growth. It isn’t an accident that both Fidelity’s and Goldman Sachs’ HC2.0 offerings are ETFs.
Professional baseball was transformed 25 years ago when the Oakland A’s validated Sabermetrics, and John Henry and the Boston Red Sox used those principles to break an 86-year drought to win the 2004 World Series. In 2009, Larry Fink broke with convention to transform investment management. But high conviction investing won’t emerge on its own. In the words of Billy Beane, it needs executives with passion, vision, and fortitude.
If “fortune favors the bold” then clearly Larry Fink did that for BlackRock. Peter Drucker also famously stated, “the best way to predict the future is to control it.” Perhaps the right questions to ask now are: who will set their sights high and challenge the status quo? Who will be the next Larry Fink?
Billy Beane is the executive vice president of baseball operations for the Oakland A’s and was the subject of Michael Lewis’ best-selling book “Moneyball: The Art of Winning an Unfair Game.” Mr. Beane also serves on Turing’s Board of Advisors.
Dr. David Goldsman is the Coca-Cola Foundation Professor and the Director of Master’s Recruiting and Admissions in the H. Milton Stewart School of Industrial and Systems Engineering at the Georgia Institute of Technology. He received his Ph.D. from Cornell University and holds degrees from Syracuse University in Mathematics, Physics, and Computer and Information Sciences. Professor Goldsman led the team that independently validated the data and methodology behind the industry’s largest study of High Conviction 2.0, published in 2024 by Turing Technology.
Robert Nestor is president and board member of Turing Technology Associates. He was formerly president and head of Direxion, a leading provider of ETFs and mutual funds, in addition to having executive roles within BlackRock and Vanguard. Rob has over 30 years of experience in asset management with functional business leadership positions across product development, enterprise commercialization, and distribution strategy.
