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“A More Balanced Narrative” Paper Challenges Common Criticisms of Active Management

November 19, 2019

Chip Bergstrom
Buttonwood Communications Group

Washington, D.C. – November 19, 2019 – The conventional wisdom on active management has been oversimplified, concludes a new white paper titled, “A More Balanced Narrative: Setting the Record Straight on Active Management” from the Investment Adviser Association’s Active Managers Council (AMC). The paper examines the current narrative surrounding active and passive investing and provides evidence that active managers can and do outperform their indexes and investors can identify managers more likely to outperform in advance.

“The growth of passive investment strategies is well-deserved, but in recent years, the narrative between passive and active has become unbalanced. 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,” said author David Lafferty, AMC Chair and Natixis Investment Managers Senior Vice President and Chief Market Strategist. “The narrative that passive is winning almost everywhere isn’t supported by either standard total return comparisons or asset-weighted return estimates.”

A few of the key findings from the paper include:

  • Many Active Managers Do Outperform: The popular narrative has been that active managers are underperforming across all styles and during all periods. However, a review of the data shows that the relative performance of active managers against their index competitors varies across both styles and time periods.
  • Zero-Sum Theory Does Not Prove the Average Manager Can’t Outperform: While Sharpe’s “Arithmetic of Active Management” may be compelling in terms of the overall availability of alpha to active managers, the math doesn’t perfectly align with how active management is measured in industry practice. Excess returns can be skewed across managers, and there is meaningful “slippage” across categories and investor types. The fact that alpha in total must equal zero does not mean that the median professional manager in a category will have 0.0% excess return before fees (and negative excess return after fees).
  • It’s Possible to Identify Outperforming Managers in Advance: While no one is suggesting that active manager selection is easy, there are factors that can substantially increase an investor’s ability to identify a manager who will outperform.
  • Active Managers Are Raising Their Game: The competitive pressures from passive indexing are forcing active managers to raise their game. They are lowering fees, investing in investment processes, increasing portfolio differentiation and focusing on risk management.

“Our goal is to counter the oversimplified conventional wisdom that all passive is good and active is bad,” said IAA President and CEO Karen Barr. “Taking a deeper look at these topics yields a much more nuanced understanding of the pros and cons of both active and passive investing styles – and how each can play an important role in investors’ portfolios.”

To review the paper or learn more about active management, please visit A video of Mr. Lafferty discussing the white paper is available online.

About the IAA

The Investment Adviser Association (IAA) is the leading trade association representing the interests of SEC-registered investment adviser firms. The IAA’s more than 650 investment adviser member firms collectively manage assets in excess of $25 trillion for a wide variety of institutional and individual investors. For more information, visit or follow us on Twitter, LinkedIn, and YouTube.

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