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.
  • Since the combination approach will keep overall portfolio costs down, active managers will be able to earn fees.
  • This allows active managers to “embrace passive managers. Trashing index funds and ETFs is not a good strategy for an active manager.”
  • “It keeps the market efficient.”

The article concludes that, while many active funds will continue to wait for the move to passive to lose steam, “that isn’t going to happen.” Active managers, it argues, “would be wise to stop the blame game, acknowledge the role they played in the rise of passive investing, and figure out the role they can play going forward.”