“Our review of the most recent literature suggests that the conventional wisdom is too negative on the value of active management,” write Cremers, Fulkerson, and Riley (2019).

This academic paper is a broad review of the past 20 years of research on active management.  The paper argues that contrary to the current consensus, “active managers have a variety of skills and, in many cases, tend to make value-added decisions. In other words, many funds do appear to create value for investors even after accounting for fees.” The authors identify specific ways active managers add value, including anticipating changes in market volatility, using information effectively, corporate oversight, and tax management.

A practical takeaway from the paper is that traditional approaches to selecting active managers – which consider past performance, investment approach, manager characteristics and the investment environment – have validity because they can identify skill in advance.

“All investors, both active and passive—as well as the real economy—benefit from the efforts and cost expenditures of active managers” writes Professor Russ Wermers of the University of Maryland’s Robert H. Smith School of Business

In this paper, Wermers focuses on a critical contributor to market efficiency: the activities of active investment managers. He describes the mechanisms that translate active managers’ activities into market efficiency. Specifically:

• Active managers correct market anomalies.
• Active managers provide liquidity.
• Active managers incorporate information into market prices.
• Active managers monitor corporate management.

In sum, concludes Wermers, “the average ‘alpha’ provided by active managers … does not adequately capture the value of the active management industry to capital markets.” The total value-added that active managers generate for society as a whole is significantly higher than the value of the benefits that they provide to their own investors.

When will the market reach “peak passive”? This paper reviews the literature on the relationship between index-based investing and market efficiency to shed light on the prospects for achieving a balance between active and passive investing. The research suggests that index inclusion benefits companies in the index. In addition, the research finds that increased passive investing is associated with decreased market efficiency. However, passive investing is not the sole determinant of the level of market efficiency. Therefore, reaching active-passive equilibrium will be more difficult than the traditional theory implies, suggesting that the market could well power past “peak passive.”

Active management. Passive management. Both are essential tools, each with their own advantages, for helping investors meet their goals. Investors benefit when they have access to both tools and can choose between them in the way that best suits their circumstances and objectives.

Yet, if both tools are essential, why are investors continuing to shift assets from actively managed portfolios to passively managed ones? Shouldn’t the two approaches be in balance with relative asset levels fairly stable?

“If you have even a passing familiarity with financial media, you may well believe that the debate around active versus passive management has long been settled. There seems little tolerance for any argument that active managers outperform over any reasonable time period. We think this is an unbalanced conversation that creates a false dichotomy between active and passive.”

Apurva Schwartz argues that the classic introduction to active management perpetuates myths about active management, and she makes suggestions about how this introduction should be reframed to provide a more accurate portrayal of active management’s value to investors.

“Plan fiduciaries are not prohibited from choosing investment options that provide collateral benefits other than investment returns. However, plan fiduciaries may not pursue these added benefits if they mean accepting lower expected returns or higher risk.”

This paper provides updated guidance for plan fiduciaries following the Department of Labor’s rule on ESG and investment selection. It also summarizes at a high level the principles governing the exercise of fiduciary responsibility through five decades of law, regulation, regulatory guidance and court decisions.   The paper also reviews special considerations for target date funds, default options and cryptocurrencies.

“The central insight of this paper is that sustainable investing inherently involves active decision-making.”

The traditional actively managed sustainable investing takes a dynamic approach to the assessment of materiality, thinks broadly about how those factors affect specific companies, and engages with corporate managements around their efforts to address sustainability risks. Active and index-based managers alike assess both the importance of sustainability issues and how firms are managing the risk posed by these issues. However, active and index-based managers have very different approaches to making those assessments. The active approach to sustainable investing focuses on:

• A tailored assessment of individual investments.
• A future-focused evaluation of an investment’s long-term risk and opportunity.
• A holistic approach to assessing portfolio risk management.
• A long-term commitment to stewardship.
• Integration with investor goals.

In sum, the active approach allows for a more nuanced consideration of a wider range of quantitative and qualitative factors, which helps investors tailor their portfolios to their sustainability goals.