Active Management’s ‘Genetic Defect’

“Active managers can produce persistent excess returns when it comes to their best ideas—but they only devote half of their capital to these investments,” according to a recent article in Institutional Investor that cites new CFA Institute research showing a resulting “shredding of the industry as investors have moved to passive index funds.” Turing Technology Associates founder Alexey Panchekha, who oversaw the study, is quoted: “We have discovered a genetic defect in active management as… Read More

Active Managers are Flopping Where They Shouldn’t Be

Although active managers argue that “inefficient investment areas like small-cap stocks and emerging markets are where they shine,” a new report from Willis Towers Watson found that they are missing their benchmarks. This according to a recent article in Institutional Investor. The article says, “According to WTW, less than half of managers have delivered returns above benchmarks over five, seven, and ten-year time periods, even before fees are subtracted.” After accounting for fees, the report… Read More

The Rising Bar for Active Management

By Jack Forehand, CFA (@PracticalQuant) Active managers as a whole have always been pretty bad at their job. Depending on what data source you use and what time frame you look at, somewhere north of 80% of active equity managers underperform their benchmarks after fees over long periods of time. When building Validea, we’ve tried to key in on those individuals and strategies that have a long term record of success, but the number of… Read More

Swedroe on Persistence in Active Investment Performance

In an article for, Bam Alliance director of research Larry Swedroe summarized the findings published in the S&P biannual Indices Versus Active (SPIVA) reports which compare the performance of active managed equity funds to their appropriate index benchmarks. “The bottom line,” Swedroe writes, is that “there is no evidence of persistence in performance greater than randomly expected among active equity managers. Making matter worse is that a stronger likelihood existed of the best-performing funds… Read More

Vanguard: The Future of Active Management

A recent article in offers Vanguard’s perspective on the history of active management and why it has a future. “Active management will survive, and maybe thrive, if it’s available at a low cost,” the article states, adding, “EFTs, then, offer an attractive vehicle.” The article argues that, since active ETFs emerged ten years ago, “it’s fair to say that investors have yet to adopt these investment vehicles the way they did their index-based counterparts.”… Read More

Insights on Exploiting the Inefficiencies in Small-Cap Stocks

A recent article in Advisor Perspectives outlines an interview with Judd Peters, a portfolio manager of the Hotchkis & Wiley Small Cap Diversified Value Fund. Here are some highlights: Investment process: Peters explains that his team uses a two-step process to find “opportunities in companies that are temporarily under-earning relative to their long-term potential, either due to industry cyclicality or company-specific situations.” According to Peters, “investors often overreact both positively and negatively to short-term financial… Read More

AQR Says Active Bond Fund Returns Juiced by Junk

Researchers at AQR Capital Management say that active bond fund managers are beating benchmarks by “loading up on junk bunds to juice returns.” This according to a recent Bloomberg article. “Since the category is closely linked to equities, that’s stripped away the diversification benefit bond funds normally provide,” the article states. The AQR study, which focused on several different fixed income categories, found that excess returns are highly correlated with junk bond markets. The researchers… Read More

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… Read More

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… Read More

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… Read More