Legg Mason’s Miller, for instance, offers a good cautionary reminder of just how elusive that ability to stock-pick and look ahead can be. After outperforming the market for 15-straight years through 2006, his luck seemed to have run out for a few years, and the “best fund manager” of the 1990s “ended up losing more money than he ever made for investors,” said Allan Roth, an investment advisor at Colorado Springs, Colo.-based Wealth Logic, which has more than $1.5 billion of assets under advisement.
Miller seems to be back at the top of his game this year, leading his Legg Mason Capital Management Opportunity fund to gains of more than 40 percent year-to-date, or roughly double the gains seen in the S&P 500 in the same period, according to YCharts.
“When you have thousands of managers, some will have great track records out of sheer randomness,” said Roth, who is also known for his blogging acumen on DareToBeDull.com and prolific contributions to various media outlets.
But whether that bandwidth and pricing evolution will happen in fixed income to a point where names like Pimco’s Gross and DoubleLine’s Gundlach go into history books remains to be seen.
“It might happen,” Rivelle said. “But we’re not there yet.”
Time To Rethink Active Equity Management?
Still, some note that the dominance of market-capitalization-weighted strategies among equities ETFs today is a deterrent to passive investing, because it makes investors’ portfolios susceptible to overexposure to large companies in a way that’s not necessarily good for overall returns.
A Janus report detailing the 10 reasons why active-equity investing makes sense—published on the firm’s website—argues that such an approach allows a company to represent a big part of a passive portfolio, regardless of future expectations for that company’s performance, among other things.
“We believe that surging inflows to ETFs have magnified this phenomenon,” the report said. “This investment approach looks backward, not forward, and doesn’t seek to distinguish future winners.”
Roth himself, a big proponent of keeping portfolios simple and allocated to low-cost, passive instruments, agrees that active managers are necessary for index investors in order to keep markets efficient, because active investors can act out of pure emotion in a way that passive investing doesn’t allow.
Think Jim Cramer, he says.
“If investors all invested rationally, no one would try to time the market, as research shows that the more we trade, the lower our returns,” Roth said in a recent blog. “That knowledge would drastically lower the volume of trading in stocks and mutual funds, and markets would come to a virtual standstill.
“By encouraging his viewers to buy hot stocks and move in and out of the market, Jim Cramer does more than anyone on Wall Street to keep markets efficient,” Roth said in his blog. “Unintentional though it may be, Cramer creates the market mechanism that allows long-term investors to profit from the foolishness of those who think they know what the near-term future holds or what the next hot stock will be.”
Active managers are so key to markets, that without them, “the landscape of investing would be a pretty barren place,” Roth said.