U.S. Large- and Mid-Capitalization Stocks
The first thing to notice about U.S. large- and mid-capitalization stocks, that is, stocks in companies whose names are likely to be familiar to us, is how extraordinarily efficient this category of assets is. These companies are so large and important to the U.S. economy, so many money managers and investors are buying and selling them, and so many analysts are following them, that it is virtually impossible for any one money management firm to gain and sustain a competitive advantage over its peers.
When we consider the burdens that managers bear—management fees, trading commissions, spreads between bid and ask prices, the market impact of their trading activity1 and the opportunity costs associated with making buy and sell decisions2—it's easy to understand why it is so difficult to find U.S. large-cap managers who will add to our wealth beyond what we could obtain by investing passively through index funds, exchange-traded funds (ETFs), structured funds, or passive, tax-aware funds.
As a result, many family investors will find that the most attractive approach to the U.S. large-cap sector will be to create a core position with a passive, tax-aware manager, and then supplement that position with more modest commitments to boutique or hedge fund managers selected for their ability to deliver after-tax alpha. A passive, tax-aware manager is simply a management firm that, rather than attempting to own securities that will outperform the ...