Practical analysis for investment professionals
19 June 2015

Forum: The Future of Active Management

NYSE trading floor

The travails of active managers in recent years have been well-chronicled. Their poor collective performance — widely attributed to the US Federal Reserve’s zero interest-rate policy (ZIRP), exceedingly low stock market volatility, and high correlations among equities — has led investors to flee actively managed funds for passive products and others to question their relevance.

Charley Ellis, CFA, in “The Rise and Fall of Performance Investing,” contends that the stock market has simply become too efficient and, for most investors, attempting to beat the market is “no longer a game worth playing.” And Vanguard founder Jack Bogle, who clearly has a dog in the fight, recently predicted that “in 25 or 30 years, [active managers will] be gone.”

Are active managers facing a true existential threat, as Ellis and Bogle suggest, or will their performance troubles abate in a post-ZIRP world, or when the next financial crisis or bear market hits? After all, it’s a common refrain among active managers that they earn their keep when markets fall, not when all stocks go up in unison. But few active managers escaped the market meltdown in 2008, and the resulting client trust deficit still remains.

To better understand the challenges facing active managers today, the industry’s response to those challenges, and the likely future state of the industry, CFA Institute is hosting an online forum as part of its Future of Finance initiative, a global effort to shape a trustworthy, forward-thinking financial industry that better serves society.

Our distinguished panel will include Michael A. Ervolini, CEO at Cabot Research; Carol W. Geremia, co-head of global distribution at MFS Investment Management; Mirtha D. Kastrapeli, vice president and senior research analyst at State Street Center for Applied Research; and Lawrence E. Kochard, CFA, CEO and CIO at the University of Virginia Investment Management Company.

The discussion will be held on Thursday, 25 June 2015. If you would like to share your perspective or pose a question to our panelists, please scroll to the bottom of this post and leave a comment. This article will serve as your anchor for the forum as the discussion will unfold below the text of this post.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image Credit: AP Photo/Richard Drew, File

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, is director of Member and Corporate Products at CFA Institute and serves as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

14 thoughts on “Forum: The Future of Active Management”

  1. kareem balogun says:

    I believe that one of the major causes of the decline in active management performance is the exceedingly low stock market volatility. I would like the sitting to look at the factors contributing to low stock market volatility.
    I think the major job of any active manager to a certain degree predict the direction the economy will take. I would appreciate a look into this.

    1. Dave Larrabee says:

      Kareem,

      Thanks for visiting Enterprising Investor and sharing your opinion. I hope you can follow the upcoming online discussion as it unfolds. I expect to hear a range of opinions.

      Dave

  2. NYAMBONO HESBON OTWORI says:

    Finance needs improvement to meet job requirements.

  3. Gordon Couch says:

    Active strategies are always going to struggle to beat the market, with information convergence, the likelihood of gaining an ‘advantage’ is almost impossible, combine that with high fees and around 33% of so called ‘active managers’ offering nothing more than expensive closet index huggers, the only likely outcome is a poor one for the end user, the investor.

    1. Dave Larrabee says:

      Gordon,

      Thanks for visiting Enterprising Investor. You’re certainly right when it comes to the dubious value of most index-hugging strategies.

      I hope you can follow our online forum on Thursday.

      Dave

  4. Nik S, CFA says:

    Active managers have themselves to blame with their antiquated fee structure. Paying an active manager ~1% in a zero percent world is insane. It’s like running a race with your shoelaces tied together. Reduce active manager fees (a la ETFs) and suddenly the bar to outperformance get much lower.

    1. Dave Larrabee says:

      Nik,

      Thanks for sharing your opinion. I expect the topic of fees will be part of the conversation in our upcoming online forum.

      Dave

  5. Ryan says:

    Warren Buffett is quoted as saying that “just because the market is mostly efficient, that doesn’t mean it is always efficient”. As we well know, humans have many cognitive biases which cause markets to sometimes be inefficient (value continuously outperforming glamour as one example).

    The question is, if in the future there are less human portfolio managers and more “robot” portfolio managers that rely on advances in artificial intelligence, will we still have the same inefficiencies? Obviously robots aren’t going to have the same cognitive errors that humans exhibit, so will that cause many market inefficiencies uncovered by behavioral finance to disappear?

  6. Ashok Kumar says:

    Although information efficiency is increasing around the world then also those manager who are good in forecasting right most of the time along with increase trade frequency should do well and I fully admit that it is going to be challenging area .

  7. Richard Sha, CFA says:

    There may be a fundamental flaw in passive investment management thinking. If the best investment management can do is to follow the market, it may render itself irrelevant in the big economy because it will be perceived to add no value.
    Market average is the result of many hard working individuals. Aiming for market average is a self-defeating proposition.

  8. Jeremy Weltmer says:

    Doesn’t the shift towards passive allocations to indices with tight mandates to track benchmarks mean that there’s likely room for active managers to add value through tactical allocation across asset classes (rather than just through superior security selection, which becomes tougher as index trackers increase the correlation of securities by buying irrespective of fundamental valuation)?

  9. Dave Larrabee says:

    Jeremy,

    Thanks for visiting Enterprising Investor and joining the discussion. I agree that there are opportunities for active managers who aren’t style box-constrained to add value by shifting across asset classes.

    Dave

  10. I fear the investment mosaic on passive vs active and human vs algorithm is painting “active management” with a very distorted brush. Industry veterans say the “value” of investment management is headed to zero and they are unapologetic in advising standardized MPT/ETF models for the masses. So, momentum is behind smarter phones, smarter medicine, and overly simplified investment advice?

    We private wealth managers who focus on proactive and integrated goals-based solutions should not be aggregated with the “active managers” who struggle to exploit price and value discovery through manufactured One:Many distribution models, a la a single Large-Cap Growth Mutual Fund.

    Rather, there are thousands of Chartered Financial Analysts who consider themselves appropriately “active” and who utilize a full toolkit of passive and active strategies to give clients more optimal outcomes that are rightly focused on client-centric investment policy statements. Active alpha-generators and value discovery are plentiful when you consider the unique needs of private investors: taxes, qualitative sensitivities, etc.

    Pablo Piccasso loved to create distorted images–Let’s not paint all “active managers” with the same brush! With Gratitude, Michael

  11. Dave Larrabee says:

    Michael,

    Thanks for visiting Enterprising Investor and contributing to the discussion. Your points are well-taken, particularly the distinction you draw between “active” private wealth managers who focus on client solutions and build portfolios made up of passive and active products, and those investment professionals who create and manage the active products. I would only add that I think there are still many skilled active fund managers, CFA charterholders among them.

    Dave

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