The travails of active managers in recent years have been well-chronicled. Their poor collective performance — widely attributed to the US Federal Reserve's zero interest-rate policy (ZIRP), exceedingly low stock market volatility, and high correlations among equities — has led investors to flee actively managed funds for passive products and others to question their relevance.
Charley Ellis, CFA, in "The Rise and Fall of Performance Investing," contends that the stock market has simply become too efficient and, for most investors, attempting to beat the market is “no longer a game worth playing.” And Vanguard founder Jack Bogle, who clearly has a dog in the fight, recently predicted that “in 25 or 30 years, [active managers will] be gone.”
Are active managers facing a true existential threat, as Ellis and Bogle suggest, or will their performance troubles abate in a post-ZIRP world, or when the next financial crisis or bear market hits? After all, it’s a common refrain among active managers that they earn their keep when markets fall, not when all stocks go up in unison. But few active managers escaped the market meltdown in 2008, and the resulting client trust deficit still remains.
To better understand the challenges facing active managers today, the industry’s response to those challenges, and the likely future state of the industry, CFA Institute is hosting an online forum as part of its Future of Finance initiative, a global effort to shape a trustworthy, forward-thinking financial industry that better serves society.
Our distinguished panel will include Michael A. Ervolini, CEO at Cabot Research; Carol W. Geremia, co-head of global distribution at MFS Investment Management; Mirtha D. Kastrapeli, vice president and senior research analyst at State Street Center for Applied Research; and Lawrence E. Kochard, CFA, CEO and CIO at the University of Virginia Investment Management Company.
The discussion will be held on Thursday, 25 June 2015. If you would like to share your perspective or pose a question to our panelists, please scroll to the bottom of this post and leave a comment. This article will serve as your anchor for the forum as the discussion will unfold below the text of this post.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
14 Comments
I believe that one of the major causes of the decline in active management performance is the exceedingly low stock market volatility. I would like the sitting to look at the factors contributing to low stock market volatility.
I think the major job of any active manager to a certain degree predict the direction the economy will take. I would appreciate a look into this.
Kareem,
Thanks for visiting Enterprising Investor and sharing your opinion. I hope you can follow the upcoming online discussion as it unfolds. I expect to hear a range of opinions.
Dave
Finance needs improvement to meet job requirements.
Active strategies are always going to struggle to beat the market, with information convergence, the likelihood of gaining an 'advantage' is almost impossible, combine that with high fees and around 33% of so called 'active managers' offering nothing more than expensive closet index huggers, the only likely outcome is a poor one for the end user, the investor.
Gordon,
Thanks for visiting Enterprising Investor. You're certainly right when it comes to the dubious value of most index-hugging strategies.
I hope you can follow our online forum on Thursday.
Dave
Active managers have themselves to blame with their antiquated fee structure. Paying an active manager ~1% in a zero percent world is insane. It's like running a race with your shoelaces tied together. Reduce active manager fees (a la ETFs) and suddenly the bar to outperformance get much lower.
Nik,
Thanks for sharing your opinion. I expect the topic of fees will be part of the conversation in our upcoming online forum.
Dave
Warren Buffett is quoted as saying that "just because the market is mostly efficient, that doesn't mean it is always efficient". As we well know, humans have many cognitive biases which cause markets to sometimes be inefficient (value continuously outperforming glamour as one example).
The question is, if in the future there are less human portfolio managers and more "robot" portfolio managers that rely on advances in artificial intelligence, will we still have the same inefficiencies? Obviously robots aren't going to have the same cognitive errors that humans exhibit, so will that cause many market inefficiencies uncovered by behavioral finance to disappear?
Although information efficiency is increasing around the world then also those manager who are good in forecasting right most of the time along with increase trade frequency should do well and I fully admit that it is going to be challenging area .
There may be a fundamental flaw in passive investment management thinking. If the best investment management can do is to follow the market, it may render itself irrelevant in the big economy because it will be perceived to add no value.
Market average is the result of many hard working individuals. Aiming for market average is a self-defeating proposition.