A More Balanced Narrative: Setting the Record Straight on Active Management

A MORE BALANCED NARRATIVE

Setting the Record Straight on Active Management

Abstract

wp-cover.jpgThe tug of war between active and passive investment strategies has grown increasingly one-sided in recent years. This paper examines the current narrative surrounding the two styles and challenges the conventional wisdom driving the three most common criticisms of actively managed investments: that active managers don't outperform their indexes, that active managers can't outperform their indexes, and that identifying above-average active managers isn't possible. The paper presents a more balanced discussion of the factors that drive relative performance between active and passive investing, examines the methodologies for comparing the two approaches, and argues that passive investing is raising the bar for active managers. Active and passive strategies can happily coexist and both offer distinct benefits. Only when investors abandon the false dichotomy that one is good, the other bad, will they be able to build more optimal portfolios.

David F. Lafferty, CFA
Chair, Active Managers Council

 

TABLE OF CONTENTS

Introduction

Acknowledging Strengths and Shortcomings

#1 – Active Managers Don’t Outperform: The Empirical Argument

#2 – Active Managers Can’t Outperform: The Theoretical Argument

#3 – Investors Can’t Identify Outperforming Managers: The Selection Argument

A Brighter Future For Active Managers / Active Management Adapts

Summary

About the Author

Acknowledgements

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