To Active Managers: If You Can’t Beat ‘Em, Join ‘Em

Arguing that the shift to passive investing is “really just a reflection of an even bigger move away from high-cost to low-cost funds,” a recent Bloomberg article suggests that active managers might want to consider offering their services as part of a complementary role to boost overall portfolio returns. Several arguments are offered, including: “It lets active managers be truly active.” If benchmark returns are coming from the passive portion of a portfolio, this allows the active manager to be “truly active and make high-conviction bets.” Such a dynamic increases investors’ ability to better tolerate underperformance on the active side. […]

Ritholtz on the Challenges of Active Investing

In a Bloomberg article from earlier this month, columnist Barry Ritholtz outlines some of the benefits and challenges inherent in active investing. He cites the following “desirable goals” and some corresponding impediments to those goals: Alpha: outperformance versus a benchmark. “Of all the reasons to be an active investor,” writes Ritholtz, “alpha may be the most difficult to achieve.” He underscores the significant hurdle that both fund managers and individual investors face when attempting to choose benchmark-beating stocks. Expressive: investing toward a specific goal. An “unstated” desire of many investors is to “use their capital as an expression of their […]

Research to Help Choose Between Active or Passive Investing

A new research paper by Vanguard provides a framework for the decision between active and passive investing, according to an article on the company’s website. The paper intends to help the decision-making process by “enabling investors to think more explicitly about their expectations and the risks they’re willing to accept.” Here are some variables the paper cited as important for investors to consider: Gross alpha expectation—the “ability to achieve successful outcomes through skill in selecting an active manager”; Cost of active management—”low cost is the most effective quantitative factor an investor can use to improve the chance of success;” Active […]

Indexing Beats Smart-Beta Track Record

Many smart-beta funds– which develop portfolios focusing on various factors such as low volatility, value, or momentum– have underperformed the market, especially after accounting for fees and expenses. This according to a recent MarketWatch article which concludes, “Tally another point in the pro-indexing column.” While the article points out that the rate of outperformance depends on the time frame analyzed, it says that “broadly, only 30% to 40% of smart beta exchange-traded funds beat their benchmark on an absolute basis, while only 25% to 32% do on a risk-adjusted basis” (data provided by UBS). According to the article, the absence […]

Warning to Index Fund Investors

The more investors index, the higher the costs for those that don’t, according to a recent MarketWatch article. The benefit of indexing–lower costs and higher long-term returns—only exists, the article argues, if there is an “active, functioning market underlying whatever index a fund is trying to capture the performance of.” The problem arises, it asserts, in that the market can’t exist without active investments born of research and analysis that serve to set prices on individual issues. The vicious cycle comes as the low-cost nature of index investing attracts more investors, which leads to higher costs for non-indexers, which only attracts […]

Study Finds that Stock Picking Probably Won’t Make Investors Rich

While some stock pickers can successful, investors should keep in mind that the odds are against them, according to a recent article inThe New York Times. “It’s not just that bull markets like this one eventually come to an end,” the article says, “It’s that over the long run, while the total stock market has prospered, most individual stocks have not.” It offers findings from finance professor Hendrik Bessembinder (of Arizona State University) showing that, “A very small percentage of winning stocks have done splendidly, but when gains and losses are tallied up over their lifetimes, most stocks haven’t earned […]

Fool’s Gardner on Active Versus Passive Investing

In a recent interview with WealthTrack’s Consuelo Mack, Motley Fool’s Tom Gardner shares insights regarding active versus passive investing and where he sees market opportunities. Tom Gardner, who’s mission through his Motley Fool multi-media network of financial services is to “help the world invest better.” He asserts his belief that index investing is the best first choice for many investors, but not because it’s impossible to be successful through active investing. Active investing, he explains, is a non-starter for many people because they aren’t interested in the process, in getting up the learning curve on companies. For these investors, he […]

The Math of Stock Picking Works Against Active Managers

The concentration of gains in a minority of index fund holdings—a statistical concept called positive skew—makes it extremely difficult for active managers to beat benchmarks, according to a recent Bloomberg article. Research conducted in 2015 found that “the distribution of returns in the stock market is bizarrely lopsided,” the article argues. “It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks.” According to Rob Arnott of Research Affiliates: “The focus is often on the random walk and the coin toss analogy, and the impact of skewness is overlooked.” In a coin toss, there’s a 50% […]

Is It Time for Active Managers to Shine?

“Passive funds tend to attract more inflows after the underlying indexes have performed well, so they’re driven by momentum rather than by analysis of company valuations and fundamentals,” according to a recent article in Barron’s. The article quotes Mike O’Rourke, chief market strategist at Jones Trading, who argues that passive strategies “have a place in the market, but the problem is if they become the market” and when investors believe across-the-board that it’s okay to sacrifice due diligence and “outsource their decision-making process to the Standard & Poor’s index committee.” Index funds have been a “no-brainer,” the article says, given […]

Active Management Versus Passive Investing: How to Choose

Active management fees, coupled with periods of underperformance, have made low-cost index investing attractive for investors, writes Validea CEO John Reese in a recent article for The Globe and Mail. Indexing, Reese explains, was developed as a way for investors to track the market’s return while maintaining diversity and avoiding the time and risk associated with finding the right active manager. The article cites Morningstar data showing that, last year, the flow of funds into passive strategies totaled $505 billion, while $340 billion was withdrawn from active management. The trend, writes Reese, ‘is upending the asset-management industry.” He notes, however, […]

Stock-Pickers Have Underperformed Benchmarks for the Past 15 Years

According to the latest S&P Indices Versus Active funds scorecard, over the last 15 years (ended December 2016) 82% of all U.S. funds were unable to beat their benchmarks, according to a recent Wall Street Journal article. This supports the growing view that active managers are unable to justify their fees and that “even those managers who do outperform their passive counterparts can’t sustain it year after year,” according to the article. Although active managers often argue that performance should be measured over the longer term, the article contends that the majority of active funds underperform even over “a full […]

Index over Active Management Still Requires Discipline

The inevitable periods of underperformance often suffered by active managers—coupled with their relatively high fees—make index investing a more attractive option for many investors. This according to a recent Globe and Mail article by Validea CEO John Reese. Reese writes, “By Mr. Buffett’s reckoning, investors have lost out on $100 billion in fees and underperformance over the years.” The movement to index investing, he argues, is “up-ending the asset management industry.” Still, according to Reese, investors should exercise discipline when choosing index funds, as such funds can also suffer long periods of low returns. Investors can find good active managers, […]

Greenblatt Blends Active and Passive Strategies in New Fund

Joel Greenblatt, managing partner of Gotham Asset Management, may have figured out a way to make active strategies appeal to passive investors, according to a recent article in Forbes. The legendary investor and author of The Little Book that Beats the Market (2010) has started a new fund called the Gotham Index Plus Fund that seeks to bend passive an active management strategies by tracking the S&P 500 and using it, the article says, as an “overlay strategy to build a long/short exposure based on Gotham’s value models.” The article outlines a recent interview with Greenblatt. Here are some highlights: […]

Active Funds Perked Up in January

January was a good month for actively managed funds, says a recent Bloomberg article that states, “the majority of actively managed value funds in the U.S. and Europe outperformed their benchmarks in January.” This according to strategists at Lyxor Asset Management. Most European growth funds also beat the market, the strategists recently wrote. However, Lyxor cautions that one month’s worth of data isn’t enough to draw many conclusions and that, in fact, value outperformance has pulled back in recent weeks. “The recent success of active investing” the analyst note says, “is too short to draw robust conclusions,” adding that they […]

Mauboussin on Active Vs. Passive Management

A paper co-authored by Michael Mauboussin of Credit Suisse addresses important issues to consider in relation to the continued and increasing shift from active toward passive fund management. Those investors who are moving their money to passive funds, the paper argues, are “less informed than those who stay.” For every winner, it says, there must be a loser—and if there are fewer losers, the game becomes less interesting. In other words, as markets become more efficient (fewer losers) the potential upside for the winners (passive funds) is reduced. While associated with lower costs, passive fund management also “introduces the possibility […]