“It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” This quote from Upton Sinclair might resonate with proponents of passive investing who find themselves faced with another argument for active management, written by a commentator whose salary is indeed paid for by active management.
But mindful of the immense challenges faced by institutional investors today and inspired by my firsthand observation of highly skilled asset managers over more than 20 years, I think it is worth sharing several reasons why I believe active management has a meaningful role to play in investors’ portfolios, even (and perhaps especially) in a world where passive investing may too. I frame this argument through seven concerns that I believe investors must address as they consider how passive and active strategies can help them achieve their investment objectives.
1 See, for example, Greenwich Associates’ 2015 US Institutional Investors survey, which found average equity and fixed- income allocations of 54% and 35%, respectively.
2 Data Source: Standard and Poor’s
3 Data Source: MSCI
4 Data source: FactSet
5 Source: Horizon Actuarial Services, Survey of Capital Market Expectations, August 2019
6 Source: MorningStar
7 See, for example, Joseph Gerakos, Juhani Linnainmaa, Adair Morse, “Asset managers: Institutional performance and smart betas,” Chicago Booth Research Paper, No. 16-02, November 2016
8 See, for example, Clifford Asness, Tobias Moskowitz, and Lasse Heje Pedersen, “Value and Momentum Everywhere,” The Journal of Finance, Vol. 68, No. 3, June 2013 and Andrea Frazzini and Lasse Heje Pedersen, “Betting Against Beta,” Journal of Financial Economics, Vol. 111, No. 1, January 2014.
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