Active Management Vindicated?

For years, investors have been sold, and have been buying BIG time, the notion that active investment managers DO NOT beat the indexes. The average fund manager doesn’t beat the index, and they charge fees to do so, so they cost you money to get lower net returns!

This all made sense, as EVERY index just went up and up and up since the recovery from the Great Recession.

I said all along that this flock to passive investment was a bubble in itself, exhibiting typical bubble behavior. It was a bubble not to an asset type, but to a strategy that SEEMED to be different, and better. Active managers and hedge funds have been tested, questioned, doubted and punished in the form of net outflows for years.

Now let’s be clear: MANY mutual funds and hedge funds deserved to be squeezed out of existence. Low quality or expensive funds could not stand up to the pressure, and folded or shrunk, or changed their ways.

But as expected, the flock to passive has been overplayed. CNBC reported $21B in ETF outflows during last week’s selloff. As prolonged volatility persists, and the market staggers, confidence will fade, stocks that have been along for the market ride will struggle, and active managers will show their value again.

In fact, it may already be happening, as early indicators are that active managers delivered on the promise they have made all these years: When things change, we’ll shine, so stick with us.

Does this mean they have won the argument? Not yet, but it is an early piece of evidence that the move to passive was indeed overplayed, and that active will get respect once again.

 

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