It must be time for active management to shine. Or not

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When markets are choppy, active managers are said to come out of the dark. But if you look at the numbers, this story turns into a myth.

Stephane Lamb [00:00:00] Hello and welcome to By The Numbers, I’m your host, Steve Lamb. In this episode, we explore active and passive fund management strategies. This year has already seen some good bumps in the road for financial markets. The inflation figure is rising more than it has been since the 80s. Bigger even than the shoulder pads of this decade. Interest rates are rising. Markets fall. Even crypto is down and seems pretty correlated right now. So clearly, it must be time for active management to shine, right? Maybe not. We’ve all heard a dozen times that while passive strategies are growing in popularity, there is a time and place for active strategies when markets are choppy and volatility is frothy. Active managers are said to come out of obscurity and rise above the chart, delivering alpha while market beta disappears into the maelstrom. But if you look at the numbers, that story turns to myth like fog in the morning sun, according to S&P vs. Active Scorecard, or Seva, a biannual research series comparing active fund managers to their respective S&P benchmarks. Nearly 94% of active managers have underperformed their respective benchmarks over the past 20 years. When you look at the individual segments of US stocks, the myth could best be described as a horror story. The top performing group in terms of active management of large-cap value funds saw a whopping twenty-four point eight eight percent of active managers outperform. Other notable outliers include real estate at eighteen point three percent. And how about the large-cap growth funds that have seen a level of success from the Jacksonville Jaguars at point two, nine percent of managers outperforming? Keep in mind that this is a 20 year period we are talking about, which included the dot com breakup and the financial crisis of 2008.

Devin McGinley [00:01:49] Looking at the flip side of the fixed income coin, the story is better. But still a minority of managers beat the market. In fixed income, you have straightforward winners, such as an investment-grade long fund where about 47% of managers win, and government long funds where thirty-eight point five percent of managers beat their benchmark. But you also have investment-grade short funds in one-eyed emerging-market debt funds that water zero percent from winning managers. Investors have followed these trends, according to Eric Balchunas, ETF analyst at Bloomberg Intelligence, active stocks saw $400 billion in net outflows in 2021, while active bond funds took in $350 net. Still, there are few signs of active managers slowing down, especially as regulatory changes have brought the strategy more prominently into the ETF space. Almost two-thirds of ETFs launched in 2021 were actively managed. The first time these fund launches outnumbered their passive counterparts, and advisors are still using the products despite the checkerboard long-term performance track record. According to our latest Future Flows report, 81% of advisors use some sort of active fund with their clients, and over the next year, 32% expect to increase their exposure to actively managed ETFs, making them the most demanded investment product in our country. survey. Active management therefore continues to have its place. But advisors need to be picky, and holdings may not be the same size or duration as other items in the portfolio.

Stephane Lamb [00:03:18] As the S&P researchers put it, whether investment outcomes are attributed to skill or luck, true skill is likely to persist while luck is random and fleeting. Thus, a measure of competence is the consistency of a fund’s performance relative to its peers or benchmark. Tune in next week for a preview of the great wealth transfer that is looming. Thanks for watching By The Numbers.

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