Unlocking Real Value Blog

AK In The News: Active Management Down, But Not Out

Active management has unquestionably been under fire lately, especially since the vast majority of actively managed funds have underperformed the market the past few years. So is active management down and out, or just down? Ignites, a Financial Times Service, conducted a poll of its readers last week and roughly 83% of respondents felt that active management will come back; almost 800 people responded to the survey.

I was quoted in the article – and I agree – active management may be down but it is not out. My quote:

“It has unquestionably been a tough time for active management. Witness the outflows at American Funds and some other mutual fund complexes. I do agree that stockpickers will be back and some have actually done quite well despite the overall trend. At the end of the day, it is important to remember that it is a market of stocks. Some will do better than others based on company-specific characteristics and industry specifics.” I added “The rise of indexing and exchange-traded funds will continue, but portfolios still will be composed of both actively and passively managed funds.”

I also want to add that in the case of American Funds, which has been hit hard in the press, it’s also an issue of size. As any fund gets bigger it gets harder to outperform as they are forced to invest new cash regardless of their current outlook on the market. As they become larger, they become more like the market – and thus outperformance becomes more difficult.

So let’s be careful not to confuse size and underformance with the death of active management. This isn’t the first time that this discussion has taken place in down times, and it probably won’t be the last!

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