I was fortunate to have been part of the small group of professionals who launched exchange-traded funds roughly 25 years ago. In 1993, State Street Global Advisors and the AMEX debuted the SPDR S&P 500 ETF, ticker SPY (which grew into the SPDR ETF franchise), and I led the team that introduced the first WEBS for Morgan Stanley (which evolved into the iShares product line).
I have been an active participant during the past next quarter century as this once upstart product concept emerged as a dominant force in the investment industry. Globally, ETFs now command more than $5 trillion in assets, and ETFs have arguably supplanted traditional mutual funds as the primary vehicle for delivering passive, or index-based investment management.
The ETF industry is known for its innovation, and waves of innovation have driven ever-higher levels of asset dominance, led by breakthrough successes such as SPDR Gold Shares (GLD), fixed-income ETFs and so-called smart beta ETFs. I have personally advised multiple countries as they attempted to keep pace with the U.S. by creating the operational infrastructure and regulatory framework for their countries to enter the global ETF marketplace.
None of this success has surprised me based on the natural advantages of the ETF versus traditional funds in such critical features as cost, intra-day trading and tax efficiency. However, what has surprised me is that ETFs have yet to successfully disintermediate traditional mutual funds for active investment management. For years I have received requests from active fund managers for assistance in finding a means of accessing the ETF market. And to date neither their efforts nor my own have been sufficient to solve the challenges blocking the path forward towards a true actively managed ETF that provides predictable investment results.
Until perhaps now.
Like most great innovations, this potential solution did not come from an expected source. It is not an operational fix. Nor is it enabled by a new set of regulatory guidelines or even conceived by an industry insider. Rather, it came out of proverbial left field, where artificial intelligence and traditional investment management were brought together by a small team of mathematicians to create a new approach to generating active investment solutions. They called it Ensemble Active Management, or EAM.
And even better, it is not a singular strategy. It is better described as a new paradigm towards investing; a new approach that is as philosophically different from traditional active management as passive management is from active. As such, it is applicable to most any asset class and any geography, and is capable of generating thousands of distinct and viable strategies.
Nearly a year ago I was introduced to EAM, which is created by applying the decades-old mathematical techniques known as Ensemble Methods to the high conviction stock predictions of fund managers. Over the ensuing 10 months I’ve done a deep dive into the concept, talking in-depth to the originating professionals to understand the mathematical (and common sense) underpinning of this amazing new paradigm.
Having seen a significant amount of backtested data and a growing amount of live performance data, I eventually agreed to participate as a contributing editor for a new white paper that introduced Ensemble Active Management to the industry, and along the way sharpened my knowledge of the concept even further. (The white paper, “Ensemble Active Management – the Next Evolution in Investment Management” is currently available for free download at ensembleactivemanagement.com.)
Based on what I have seen and learned over the past year, and reflective of my quarter-century of experience in understanding the drivers of growth and success in the ETF industry, EAM appears to me to be well-poised to lead the next wave of innovation-driven expansion of the ETF industry by potentially setting sights on the trillions of dollars in assets held in traditional actively managed mutual funds.