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Rigorous, data-driven research is the foundation for the Council’s efforts to balance the narrative on active and passive investment management. Since 2018, the Council has sponsored research, developed thought leadership and hosted educational events to serve as a resource for investors and policymakers seeking to learn more.

A diverse team of Council members representing different viewpoints, business models and investor types oversees our research process. Collectively, this team has produced a growing library of commentaries and insights on active management designed to help investors make informed decisions for investment planning and portfolio construction.

Highlighted here are seven substantial pieces of academic and original Council research followed by selected insights curated from leading investment firms and academics from across the industry debunking myths, exploring active management’s vital importance to the securities markets and examining the essential role of active management in ESG and sustainable investing.

Council Academic Research

This research was supported by the Active Managers Council. Download requires membership, subscription, or fee.

Challenging the Conventional Wisdom on Active Management

K.J. Martijn Cremers, Jon A. Fulkerson, Timothy Brandon Riley
Financial Analysts Journal | July 18, 2019 | Volume 75, Issue 4

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Active Investing and the Efficiency of Security Markets

Russ Wermers
Journal of Investment Management | January 2021 | Volume 19, No. 1
Winner of the 2021 Harry M. Markowitz Special Distinction Award from the Journal of Investment Management and New Frontier Advisors

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“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.

Council Publications

Legal Context of Defined Contribution Plan for Fiduciaries

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A More Balanced Narrative: Broadening the Discussion on Active Management

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Rethinking Survivorship Bias in Active/Passive Comparisons

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Sustainable Investing
is an Active Process

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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.

“Active and passive strategies can happily coexist,” writes author Dave Lafferty. “Only when investors abandon the false dichotomy that one is good, the other bad, will they be able to build more optimal portfolios.”

The tug of war between active and passive investment strategies has grown increasingly one-sided in recent years. This 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. It counters the oversimplified conventional wisdom that all passive is good and active is bad. In so doing, it illustrates a much more nuanced understanding of the pros and cons of both active and passive investing styles and how each can play a role in investors’ portfolios.

“Studies of actively-managed funds that incorporate survivorship bias adjustments may need to reconsider their methodologies if they are to make an accurate assessment of manager skill.”

In this article, we take a close look at the survivorship bias adjustment in one of the most visible comparators of active and passive fund performance — Morningstar’s Active/Passive Barometer — and examine how that adjustment is affecting perceptions of the value of active management. We discuss passive fund survivorship rates and how they might be incorporated in survivorship bias calculations. We conclude with observations regarding the limitations of survivorship bias adjustments, especially when evaluating performance over long periods. In sum, investors should not rely on the popular “scorecards” for active and passive management – at a minimum, they should be taken with a big grain of salt.

Readers may also be interested in Persistence Scorecard Doesn’t Predict Investor Success, a related piece that similar exposes flaws in the methodology behind the S&P Persistence Scorecards.

“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.

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

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Active Management and
Market Efficiency

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“Overall, the works discussed [in this paper]. . . . suggest a new conventional wisdom: that active and passive both add value for investors in different ways and that active investing is essential to the health of the markets.”

As a follow up to A More Balanced Narrative (2019), this paper examines more recent thinking on active summarizing themes on active and passive investing, including:

  • Reassessments of the conventional wisdom regarding active management
  • The role of active management in sustainable investing
  • Revisions to approaches to measuring investment success
  • A new awareness of the active aspects of all investing
  • The centrality of active management in maintaining market efficiency

Overall, the studies discussed in this paper present a more balanced narrative about the value of active management.

“Given the important role that efficient markets play in developed economies, the academic literature provides ample evidence of the critical part played by active management in economic growth and capital formation.”

This paper reviews the empirical evidence on trends in market efficiency in the United States and the role that active management plays in creating market efficiency.

Active management is the driver of market efficiency. Active managers perform research on issuers, analyze assets underlying securities and assess values. Through the buying and selling process, active managers establish the market prices for securities. By contrast, passive managers are usually “price takers” rather than “price makers.” Therefore, in the broadest terms, an increase in the amount of active management will lead to greater market efficiency, while an increase in passive management will reduce market efficiency.

A body of academic literature studies how the increase in passively-managed assets – and the concomitant decrease in actively-managed assets – has affected market efficiency. Taken together, these studies suggest that: pricing efficiency has declined, return comovement has increased, securities prices are more volatile, liquidity has decreased and liquidity exhibits greater comovement.

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