2. The argument is based on the premise that active managers can position their portfolios to benefit from the prevailing conditions.
ACTUAL MARKET SITUATION
1. The index is the average of all the investments in a given market and for every pound that outperforms the average, there is another pound that underperforms.
2. At first glance, this appears to give us a 50 per cent chance of success.
3. However,after costs, more than half of the invested pounds lag the average, or the index. And, because active funds tend to have higher charges than passive funds, they have to clear a higher hurdle before they add value.
4. Changes in market direction tend to happen quickly and with little warning. To add value, active managers need to anticipate change; draw the right conclusions about future performance; and implement their views at a cost that doesn’t outweigh the benefits. And then they need to repeat that process on the way out of their positions.
DARWINIAN EVOLUTION
1. Today, actively managed funds are not beating the market. The market is beating them. And the long-term trend for active management is grim.
2. Distorted conventional data on the performance of active managers are now being corrected by adding back into the record the results of funds that, because they performed so poorly, had been closed or merged into other funds and then deleted from the records. This corrected data has important messages for investors.
3. Over 10 years, 83 per cent of active funds in the US fail to match their chosen benchmarks; 40 per cent stumble so badly that they are terminated before the 10-year period is completed and 64 per cent of funds drift away from their originally declared style of investing.
4. Instant communication of all sorts of information via 320,000 Bloomberg terminals, the internet, and blast faxes ensure that all investors worldwide have immediate, equal access to a global cornucopia of information, analysis and insight. With SEC Regulation FD (for fair disclosure), any investment information made available to any investor must be simultaneously made available to all investors. This eliminates what was once the “secret sauce” of active investors: getting “the first call”.
5. The number of professionals engaged in price discovery has, over half a century, exploded from an estimated 5,000 to over 1m. Hedge funds, the most intensive and price-sensitive market participants, have proliferated and now execute nearly half of all buying and selling. Algorithmic trading, computer models, and early versions of artificial intelligence are all increasingly powerful factors.
2017 Q1 PERFORMANCE
1. Stock-picking fund managers got off to a solid start this year, with 52 percent of fundamental equity managers beating their Russell 1000 index benchmarks, according to research from JPMorgan Chase. The 50 percent barrier for a single quarter has been broken only a handful of times since the bull market began in March 2009.
2. The stronger performance comes amid a decline in the tendency of stocks to move up and down together, a trend referred to as correlation. Lower correlations limit opportunities for active managers to find stocks that are mispriced and thus more likely to exceed broader market gain
3. It was a particularly strong quarter for value managers, who search for companies and sectors that may be depressed but are expected to break out. Strategies focused on value showed a 67 percent outperformance rate.
4. Growth managers had just a 41 percent beat rate. Small-cap managers generally speaking also had a weak quarter, with just 34 percent topping the Russell 2000. However, the trend particularly in large-cap is moving in the right direction.
5. However investors are shifting from active to passive funds. The first quarter saw a record amount of money pile into passive strategies, with exchange-traded funds pulling in a net $132 billion in fresh investor cash. Equity, or stock-based, ETFs drew the greatest share, hauling in $96.6 billion.
6. JPMorgan analysts estimate that more than one in three — 35 percent — investor dollars now is in the hands of passive management, up from 15 percent a decade ago.
THOUGHTS
1. Irrespective of market conditions, active management will give investors a wider spread of outcomes. Sometimes they will significantly outperform, sometimes they will be in line with the index and sometimes they will significantly underperform.
2. Reason why most investors are likely to be well-served by a passive approach for the core of their portfolio is they might get a positive return or a negative return.
3. Advisers should focus on adding value through things that can be controlled, such as long-term asset allocation, controlling cost and clients to avoid the pitfalls of behavioural bias. But first they need to narrow the range of outcomes around the market return.
4. The only way for active investors to outperform is to discover and exploit pricing errors by other expert professionals, all having the same information at the same time with the same computers and teams of experts having much the same talent and drive. The difficulty of sustaining a significant competitive advantage at price discovery continues to increase.
(Source:Fundstrategy, Financial Times)
