New IAA White Paper Challenges Myths and Criticisms Surrounding Active Management


Active managers can outperform their benchmarks and investors can identify the managers most likely to outperform ahead of time, according to “A More Balanced Narrative – Setting the Record Straight on Active Management,” a new white paper that posits that conventional wisdom on active management is oversimplified.

the white paper, presented by the Investment Adviser Association’s Active Managers Council (AMC), examines the current narrative surrounding active and passive investing and challenges the three most common criticisms of actively managed investments: managers assets do not outperform their indices; active managers cannot outperform their indices; and identifying above-average active managers is not possible.

In fact, active managers do well in some categories and poorly in others. The narrative that liabilities win almost everywhere is not supported by standard total return comparisons or asset-weighted return estimates, argued white paper author David Lafferty, president of the CMA. and Senior Vice President and Chief Market Strategist of Natixis Investment Managers.

“The growth of passive investment strategies is well deserved, but in recent years the narrative between passive and active has become lopsided,” Lafferty said.

“This paper presents a more balanced discussion of the factors that determine relative performance between active and passive investing, examines methodologies for comparing the two approaches, and argues that passive investing raises the bar for active managers,” he said. -he adds.

Here are some of the main conclusions of the article:

• Many active managers outperform: The popular narrative is that active managers underperform across all styles and all time periods. However, a review of the data shows that the relative performance of active and passive managers varies across styles and time periods.

“This is not an attempt to enlighten academics or researchers studying active and passive management. It is simply a reminder that the results depend on assumptions and are far from precise,” according to the white paper.

A look at two popular “dashboards,” the Morningstar Asset/Liability Barometer and the S&P Index Versus Active (SPIVA) report illustrates this point. For the three years ending in 2018, Morningstar reported that 59% of mid-cap growth funds outperformed the passive alternative while SPIVA reported that only 46% of mid-cap growth funds outperformed. The dispersion between the two scorecards was even greater in small cap growth, where Morningstar reported that 51% of active funds outperformed SPIVA’s 24%.

“Reading the headlines, you would think that active management is lagging everywhere and almost all the time. In fact, it is primarily in US large-cap equities that the data has lately been below par for active managers, but that is not the message investors are hearing,” according to the whitepaper. “Yet the difficulty of US large-cap mixed managers beating the S&P 500 – the largest category with the most recognized benchmark – has been erroneously extrapolated to doom active managers in all other categories. “


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