Chuck Royce: Small Stocks Poised for Rebound

In a recent interview with Barron’s, veteran stock picker Chuck Royce said that active management and value investing will survive, and small-caps are headed for a rebound. Here are highlights from the interview: Regarding the outperformance of large-caps in the past decade, which Royce characterizes as a “megacap bubble”, he anticipates “growing investor disenchantment” with large companies that are generating persistent losses, “which could be a catalyst for increased interest in the opposite—small-caps with proven… Read More

Active Fund Performed “So-So” in 2019

Although the markets “treated investors kindly last year,” a recent Morningstar article points out that most active funds lagged their benchmarks. Morningstar conducted a study of calendar-year total returns of all actively managed stock and bond funds between January 2005 and December 2019. Here is a summary of the findings: Approximately 40% of active funds beat their indexes last year, only a slight improvement from 2018. Only 20% of active U.S. stock funds outperformed their… Read More

A Loser’s Game for Active Managers

“What is ironic is that active managers have been doing exactly what they needed to do to fight back, and it still hasn’t helped much. It might even be hurting,” says a recent Bloomberg article. The article outlines steps that active managers have taken to combat the exodus to passive investing: Fee reduction— According to Morningstar, “investors now pay half as much to own U.S. mutual funds as they did two decades ago. But with… Read More

Excess Returns, Episode 2: The Rising Bar for Active Management

The market has always been tough to beat, but the ability to investors to gain inexpensive exposure to factors like value and momentum has made the job of active managers even harder. In this week’s episode, we talk about why the pursuit of alpha has become more difficult over time. We discuss: Why cheap ETFs that capture factor premiums have commoditized sources of return that used to be considered alpha How to judge the past… Read More

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