The Standard & Poor’s Index Versus Active (SPIVA) report that comes out twice a year pretty much tells a variation of the same tale every six months; namely, that only about one-third of active managers beat competing indexes in any given year, and that outperformance number drops over time. In other words, it’s hard to beat an index, and it’s even harder to keep beating an index over time.
“There are a lot of data out there that say that actively managed strategies have challenges—to put it politely—beating their respective benchmarks,” S&P Capital IQ’s Rosenbluth said.
“The investors who have gone on the ETF route have gone there for the passive approach—an ‘if you can’t beat them, join them in going with the index’ sort of thing, and there’s certainly merit behind that,” he noted.
All these data don’t mean that active management doesn’t work. It can and does, from time to time.
Stars And Necessity
The star quality litmus test will certainly come into focus when J.P. Morgan, a firm solidly associated with active management, shows its hand in the world of active ETFs. If any firm can get traction in offering active ETFs or quasi-active smart-beta ETFs, one of the world’s biggest banks is it.
Also, the question of three- and five-year track records looms large. The recent acceleration of asset growth at First Trust suggests as much. The Wheaton, Ill.-based fund firm pulled in $3.6 billion in the first quarter of this year—or 15% of all its assets—much of those assets flooding into both its smart-beta products like its AlphaDex line and its transparent actively managed securities.
Finally, it’s important not to lose sight of the necessity—yes, the necessity—of speculation and price discovery that active investors bring to financial markets. Not only will active management invariably be part of the future, it has to be, as star financial advisor Ric Edelman makes plain.
“While I disagree with the premise of outperformance that active managers use to promote their approach, I do acknowledge that without their presence, the passive strategy cannot exist,” Edelman said. “It’s the yin to the yang.”