I believe the M* 9-box style grid helps in severals ways:
- It helps investors understand how a specific fund invests its assets.
- It helps investors compare funds across fund companies.
- It reinforces a standard nomenclature. On this point, we might not all agree on the definition of value versus growth, or small cap versus large cap, but at least we all have a somewhat common understanding of what the grid is communicating.
I would like to see M* introduce a similar 9-box grid, which I’ll call the management grid. As the name implies, it would position mutual funds and ETFs within the grid based on management approach (active versus passive) and cost (low versus high). The grid might look something like this:
- M* would have to come up with definitions for the grid. For “passive”, for example, M* might use Cliff Asness’ definition of “a market cap weighted portfolio with minimal trading” (say, less than 10% annual turnover). Active might mean “individual stock analysis with more than 50% annual turnover”.
- Similarly, cost would be low if less than 25 basis points, or high if greater than 75 basis points.
- We won’t all agree on the definitions, but whatever M* came up with, it would at least put a common stake in the ground. And with just a quick glance, the grid would communicate important information based on common definitions.