As many would suggest, the writing is on the wall – add value or get out of the way. The indexing train is on the tracks and running full steam ahead, obliterating any high-fee, benchmark hugging active manager that isn’t earning its stripes. And right behind that train, just in case the first one didn’t pulverize you, is the smart beta train. Perhaps American Century got a glimpse of this reality and came to the conclusion that it should convert a 130/30 fund (essentially a beta 1 fund with 130% long equity exposure and 30% short exposure, which, by the way, is a better way to manage a beta 1 fund than just long-only) to a long-short fund that has more levers its can use to add value.
AC Alternatives Disciplined Long Short
Back in 2015 American Century launched a new brand called AC Alternatives. Under this brand resides American Century’s liquid alternative products, which now includes the AC Alternatives Disciplined Long Short Fund. However, this isn’t a new fund, but a conversion of an existing fund as noted above. While the prior fund was run with 130% long exposure and 30% short exposure, it was still restricted to maintaining a beta exposure similar to that of the market.
The new structure gives the portfolio managers more flexibility. The portfolio managers continue to be Scott Wittman and Yulin Long, both of whom have been managing the fund since its inception in 2011 (note: two portfolio managers, according to Morningstar, have been dropped from the fund over the past year with the most recent, Lynette Pang, occurring this month). The AC Alternatives Disciplined Long Short Fund is available in Investor (ACDJX), Institutional (ACDKX), A (ACDQX), C (ACDHX) and R (ACDWX) share classes.
Over the past few years, we have seen many hedge funds convert to mutual funds, but not many long-only funds (or 130/30 funds) convert to long-short funds. I would be surprised if we don’t see more of this – a lot more!
Final Note to Long-Only Managers
More managers should take a look at what American Century has done and understand that what has been known as traditional active management is under threat. Long-only managers have to evolve (and those who resist by blaming performance problems on exogenous factors basically have their head in the sand – take a good look in the mirror to find the issue!). They are restricting themselves from using the tools that are available to them, namely shorting. This limits their ability to generate more value (i.e. alpha) for their investors and higher fees for themselves. Any long-only manager that chooses not to use shorting does so at the risk of being steamrolled (think of Amazon steamrolling Barnes & Noble, think of Uber steamrolling traditional taxi drivers…. the list goes on).
Any long-only manager that chooses not to use shorting does so at the risk of being steamrolled. Think newspapers, Barnes & Noble, taxi drivers, Kodak, bank tellers, vinyl records/8-track tapes/cassette tapes/CDs, the Palm Pilot, combustion engines, etc. The list goes on. Evolve or get out of the way.