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Roberts and Schwartz Discuss the False Dichotomy of Active vs. Passive

Roberts and Schwartz Discuss the False Dichotomy of Active vs. Passive

January 30, 2025


In September 2024, Bill Roberts, CEO of GW&K Investment Management, sat down for a conversation with Apurva Schwartz, portfolio specialist at Harding Loevner. The two work together on the Active Managers Council; Roberts is chair of the Council while Schwartz is chair of the Council’s Thought Leadership Task Force.

They got together to talk about Schwartz’s article, titled “Beyond the False Dichotomy of Active Versus Passive,” which was published in the May/June 2024 issue of Investments & Wealth Monitor.

Here are excerpts from their discussion:

Roberts: Thank you for sitting down with me. Why do you feel it’s important to publish that article?

Schwartz: Thanks, Bill. When I think about the conversation in the marketplace in relation to active investing and asset management, it is an unbalanced narrative. And our view is that the empirical evidence and the theory supports a balanced narrative.

 

Roberts: One of the insights in the article was that even fans of active investing start the conversation about its value by bringing up the negative case. So why do you think that is?

Schwartz: It’s a noticeable phenomenon. I wasn’t aware of that negative slant myself until it was pointed out to me, and then it is something that you can’t stop noticing. I think it’s a combination of factors. Asset management as an industry when it comes to defending the overall case for active management maybe needs to do a better job. Also, what I find is that the negative headline often gets people to follow the article. For me it’s this idea that the negativity is garnering the most attention. The Active Managers Council is of course trying to promote a balanced approach, and we are trying to effect a change in tone.

 

Roberts: You also discussed the theoretical case for active management and make the case that the theory calls for active and passive to be in equilibrium, but that’s not common practice. Why would you expect that?

Schwartz: It’s interesting because I think the default expectation that people have is to look at and the seminal piece is William Sharpe’s [which talks about active management being a zero-sum game]. You can look beyond that in the academic literature to literature that supports the idea of balance. For example, in the 1980’s, Grossman and Stiglitz published a piece that is focused on the idea that active managers are helpful in rational price discovery. I would suggest moving beyond William Sharpe’s piece and considering this [other framework].

 

Roberts: You also make the point that active managers do well. Can you expand on that?

Schwartz: It’s funny because in the narratives and in some of the press articles, you see these sorts of sweeping statements, that active management doesn’t work writ large. That’s simply not the case. Individual active managers can outperform. And, of course, cohorts of active managers can do very well at times. Something to keep in mind is that active management can work; it can be cyclical. You need to be thoughtful and careful about deploying in an active [strategy].

 

Roberts: I know that scorecards are a popular sort of methodology to compare [active and passive]. What are your views on the scorecards?

Schwartz: The two common ones are the [S&P Dow Jones] SPIVA scorecard and the Morningstar [Active-Passive Barometer]. My view is that scorecards have a use for identifying shorter term trends. I think that’s where they can be the most helpful. But when it comes time to evaluating long-term performance of active managers, I think that there are some methodology issues that need to be considered. I would say that, like anything, there’s utility but not for every case in every situation

 

Roberts: And when you look at costs, why would an investor pay more for an active manager?

Schwartz: Fees are a big consideration for anyone paying to put money to work in asset classes. With active management, you get certain benefits. Active managers can help from a risk management perspective, with tax considerations, with access to asset classes that may be difficult to achieve. And then, of course, this idea that you could potentially get higher returns, that’s what you can get when you pay for an active manager

 

Roberts: On a personal note, you work for Harding Loevner, which is a very highly regarded and well-known firm in the international investment space. Do you have any personal stories of how active management has benefited investors?

Schwartz: When we speak about active management with our clients, we encourage them to look at the broad spectrum of where they can invest and consider where the maximal utility is for every dollar they put to work. When you look at the equity market specifically, the dollar can go farther with smaller cap companies, with international companies, emerging markets as well, [which] tend to be more inefficient asset classes.

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