No, Active Funds Won't Go Away, So Here's How To Make Money From Them

Path Financial in Sarasota, Fla., argues that the slide in the actives’ performance has been a temporary phenomenon, which you can take advantage of:

Fees charged by fund managers have come under attack, and this is especially true for active funds that try to beat an index. In recent years, they have struggled to perform better than much-cheaper passive funds that simply match their benchmarks, so their higher fees have been harder to justify.

From this, some observers have concluded that active management has proven to be pointless and all investment in the future will be passive – that is, nobody will even try to beat a benchmark anymore.  This is a wild exaggeration, to say the least. Active management will have its moment in the sun again, and that moment may be coming soon.

Shutterstock

Critics also accuse active managers of barely deviating from their benchmarks anymore. If that is true, they provide little, if any, added value or diversification, and therefore they are charging too much for a job they are not even performing.

There is some validity to the claim that active managers have not been very active in recent years. But there is more to this than meets the eye.

We measured the correlation between some popular large-cap mutual funds and the S&P 500, and found credible evidence that after the financial crisis, active funds indeed became more passive, i.e. more correlated with the index. The group we studied, which includes funds large and small, clearly provided much less diversification or additional value over the S&P 500 from 2008 to today.

But it may be incorrect to conclude that managers have simply become too lazy to do their job. A deeper look at market dynamics suggests that scaling back their efforts to outperform the market was a rational response to a significant change in market conditions.

When we looked at the characteristics of this group over 20 years, we found that regardless of size, the funds least correlated with their benchmarks performed better than the ones that followed their benchmarks more closely. In other words, the ones that were more active reaped the largest returns.

">

One of the big changes in investing these days is the decline of the actively managed mutual fund, in favor of passive funds that automatically track benchmarks like the S&P 500. Only a minority of active funds beat passive ones, and the actives charge more because they must pay high-end stock pickers. But Raul Elizalde, president of Path Financial in Sarasota, Fla., argues that the slide in the actives’ performance has been a temporary phenomenon, which you can take advantage of:

Fees charged by fund managers have come under attack, and this is especially true for active funds that try to beat an index. In recent years, they have struggled to perform better than much-cheaper passive funds that simply match their benchmarks, so their higher fees have been harder to justify.

From this, some observers have concluded that active management has proven to be pointless and all investment in the future will be passive – that is, nobody will even try to beat a benchmark anymore.  This is a wild exaggeration, to say the least. Active management will have its moment in the sun again, and that moment may be coming soon.

Shutterstock

Critics also accuse active managers of barely deviating from their benchmarks anymore. If that is true, they provide little, if any, added value or diversification, and therefore they are charging too much for a job they are not even performing.

There is some validity to the claim that active managers have not been very active in recent years. But there is more to this than meets the eye.

We measured the correlation between some popular large-cap mutual funds and the S&P 500, and found credible evidence that after the financial crisis, active funds indeed became more passive, i.e. more correlated with the index. The group we studied, which includes funds large and small, clearly provided much less diversification or additional value over the S&P 500 from 2008 to today.

But it may be incorrect to conclude that managers have simply become too lazy to do their job. A deeper look at market dynamics suggests that scaling back their efforts to outperform the market was a rational response to a significant change in market conditions.

When we looked at the characteristics of this group over 20 years, we found that regardless of size, the funds least correlated with their benchmarks performed better than the ones that followed their benchmarks more closely. In other words, the ones that were more active reaped the largest returns.

Let's block ads! (Why?)

https://www.forbes.com/sites/lawrencelight/2017/12/06/no-active-funds-wont-go-away-so-heres-how-to-make-money-from-them/