REIT Outperforms Through Active Management

As active stock managers continue to face competition from low-cost index funds, some firms have managed to outperform benchmarks by using “specialized expertise and fundamental research in sectors like real estate and energy,” according to an article in Institutional Investor. The article cites the example of Cohen & Steers, a firm that has managed real estate investment trusts since the 1980s, which is “beating index fund rivals as many have been hit hard by problems in the retail sector.” The firm’s president and chief investment officer Joseph Harvey attributes the performance to the fact that its managers, “began lightening up […]

Ariel’s John Rogers Defends Active Management

Before becoming the founder and chairman of Chicago-based Ariel Investments, John Rogers Jr. was a varsity basketball player at Princeton University and a winner at both Wheel of Fortune and Warren Buffett’s NetJets Poker Invitational in Las Vegas. This according to a recent Barrons article. During a recent interview with Barrons, Rogers said, “I worry that our industry hasn’t done an effective job of defending itself and showing the value that is added by active management.” Here are some interview highlights: Rogers gravitates toward businesses with strong recurring revenue, such as real estate management companies. “These are businesses that fit […]

Active Management is Alive and Well

An article in last month’s Enterprising Investor outlines some interesting insights into how active management is “alive, thriving and adding value across trillions of dollars of assets worldwide.” The author cites research showing that “focused” active managers—those specializing in certain asset classes, sectors, etc.—can outperform index funds. One example cited is that of smaller, earlier-stage companies where “the dispersion of returns is wide and failure rates can be high.” The article references a study showing that sector-specific private equity managers outperformed “generalists” which, it says, “suggests that a scattergun approach will backfire in private markets.” Bond index issues are addressed, […]

Has Trump Resurrected Active Management?

Hedge fund manager Dan Loeb believes the current environment is “undoubtedly better for active investing—just as active investing was considered to be on its deathbed,” according to an article on last week’s CNBC.com. Third Point’s Loeb argues that higher rates will create opportunities for active managers, “reversing the one-way trade in yields that dampened the past few years.” He cites Trump’s promises to cut taxes and regulations as potential causes for the shift. The article states, “other market strategists have also said that 2017 is the year stock picking, or active money management, can increase investment returns after suffering amid […]

Active Investors Get a Chance to Shine

From the investor’s standpoint, a low level of unemployment isn’t necessarily good news, says a recent Bloomberg article. However, it can bode well for active versus passive investors. When more people are working, it says, “Wage growth can exceed economic growth, putting pressure on corporate profit margins. Interest rates can rise, tightening financial conditions. Inflation can rise, putting more pressure on central bankers to remove liquidity from the system.” For active investors, however, it presents the opportunity to outperform benchmarks, “which are much lower hurdles to beat than in the early investor-friendly stage of an expansion.” During the current, long-winded […]

Low Cost and Know-How Key to Active Management Success

In an interview with Morningstar, Vanguard’s Daniel Wallick shares his perspective on how investors can successfully use active management. With respect to investors becoming “a bit disillusioned” when they see the success rates of active versus passive benchmarks, Wallick argues that costs should be a primary consideration. “Lower cost funds,” Wallick says, “by and large do better than higher-cost funds. Now that alone does not guarantee success even with active funds, but it is the one statistically significant factor that we can identify as helping investors.” But cost shouldn’t be the only consideration. “You have to marry top talent with […]

Greenblatt Weighs in on Active Management

“Most people have a tough time sticking with active managers who underperform for a period of time. But of course, if you’re going to beat the market, you have to do something different than the market. And active managers will zig and zag differently,” explains Joel Greenblatt, founder of Gotham Asset Management, in a recent interview with Morningstar. Greenblatt discusses his firm’s disciplined valuation process that uses both absolute and relative value metrics to rank the 2,000 companies in its database, “We stick to it. It works over time.” According to Greenblatt, the vast majority of investors lack the experience […]

Not All Active Managers Created Equal

As investors continue to divert dollars from actively managed funds to lower-cost passively managed index funds, research conducted by two finance professors at Pace University has revealed an interesting finding, according to last week’s Wall Street Journal. The study found that diversified emerging-markets funds that are actively managed are more likely to outperform their less actively managed peers as well as index funds. Matthew Morey and Aron Gottesman, finance professors at Pace University’s Lubin School of Business in New York, tracked the 67 U.S.-based actively managed emerging markets funds in the Morningstar database from 2009 through the end of 2014 […]

A To-Do List for Active Managers

A new book entitled Winning at Active Management: The Essential Roles of Culture, Philosophy, and Technology, co-authored by William Priest, CEO at Epoch Investment Partners, addresses the reasons behind the difficulties active managers are facing as well as some strategies they can use to overcome them. An excerpt of the book was recently published in Barron’s. It argues against the notion that recent underperformance indicates efficiency of the markets. Instead, it suggests that active managers must be able to understand the underlying causes of price inefficiencies in order to exploit them and, further, must recognize that they are subject to […]

Active Managers May Have a Fighting Chance

The number of Americans who own individual stocks has “steadily declined since the 1990s,” a situation only exacerbated by the flow of dollars into index funds. This according to a Wall Street Journal article from earlier this month. Between 2005 and 2015, says Bank of America Merrill Lynch, an average of only 37% of large-cap mutual funds outperformed the Russell 1000 in any given year. In the first seven months of 2016, only 14% beat the benchmark. The article attributes the turbulent global economy and weak earnings as a few factors making things tough for active managers. It argues, however, […]

Active Managers Face Tough Climb, But Some Worry About Growth of Index Funds

Financial Times reports on the challenges facing active managers, as well as the underperformance. The article notes that “in the first quarter of 2016 most failed to beat whatever market they are professionally judged against, and the proportion to prevail was the smallest since 1998,” based on Morningstar data. Further, and HFR release showed that “the average hedge fund has lost almost as much of its clients’ money [in the first quarter] as it did in the whole of 2015, 1.1 [%] after fees” and “judged by assets, investors in hedge funds have lost 2.7 [%] this year.” In contrast, […]

Underperformance Among Active Managers in First-Quarter Volatility

A recent Bloomberg article highlights the first-quarter’s unusual volatility, and the underperformance of many active managers – a group one might expect to have gained in such conditions. The article notes that, so far in 2016, the S&P 500 “lurched lower by 10 percent in the first six weeks and still managed to close the first quarter in the green – the biggest such turnaround since 1933.” “The reversion in the second half of February was unreal,” says Craig Sterling of Pioneer Investments, but “it’s been a tough go for active managers” because “people were positioned very defensively and a […]

Indexing Continues to Put the Smackdown on many Active Fund Managers

Bloomberg reports on a recent study by S&P Dow Jones Indices that found most active managers underperformed the relevant S&P benchmarks. Specifically, 66% of large-cap, 57% of mid-cap, and 72% of small-cap managers underperformed the S&P benchmarks for their categories last year. Further, over five years, 84% of large-cap managers underperformed, while 82% underperformed over the last 10 years. However, a majority of actively managed funds investing in international and developed markets outperformed their benchmarks. The article also notes that “actively run U.S. equity funds suffered outflows of $174 billion,” according to Morningstar, while Vanguard (known for index funds) “attracted […]

Sticking With the Best Alpha Generators

Barron’s profiles Dan Wiener, who runs The Independent Adviser newsletter , founded the firm Adviser Investments, and was ranked number 69 on Barron’s list of the top independent investment advisers. Wiener, whose newsletter focuses primarily on Vanguard, says “I think what people have lost sight of is: You have access to some of the best investors in the world through a mutual fund. According to Barron’s, his firm’s typical portfolio has eight to nine mutual funds, usually a third from Vanguard, a third from Fidelity, and a third from other firms.” In selecting the funds, Wiener focuses on the best […]

Learning from Swensen’s Success at Yale

Yale’s endowment fund has performed exceptionally well under David Swensen, returning an average of 10% per year since 2005, beating all major stock indexes and all but 2 of Morningstar’s mutual fund categories. Morningstar’s John Rekenthaler suggests that this outperformance comes from Swensen’s unconventional choices, but quickly quickly parrots Swensen’s advice to individual investors: “don’t try this at home.” So what can we learn from Yale’s success? Rekenthaler identifies a few possible lessons from Yale’s success: Illiquid assets can be more profitable; Reduce or eliminate bond holdings, if possible; Invest with funds run by successful active managers. Each of these […]