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RP: It’s widely known — at least it is within the investing industry — that active fund managers have had a difficult few years. Even only relatively short time periods, they’re struggling to beat their benchmarks. So, is it getting harder for active managers to add value? And if so, why? Here’s Ben Johnson from Morningstar in Chicago.
BJ: If you just think of the availability of information, the level of training just how many well-credentialed and equipped professionals are out there competing directly against one another for what is a finite and probably shrinking pool of alpha. This is a real challenge that is facing active managers, not just in the US but in all corners of the globe, and it is one that I do not think will soon reverse.
RP: Some say there are other, specific reasons why outperformance has been so rare in recent years. Some managers, for instance, blame it on quantitative easing or on
BJ: When you see markets trending in one direction, the purest form of that market, be it a US total stock market index fund, or a US growth index fund is exceedingly difficult for active managers to outperform because those index funds by definition, are always fully invested and they are very style pure. So part of what we have been seeing is cyclical. Part of it is certainly structural if you just look at the elevation of the skillset, the game sort of the armaments of the active management industry. However, I think some of the other explanations, be it the
RP: Of course, no one knows when, or indeed whether, active managers will start performing better. The bottom line, though, is that active management is a zero-sum game. One manager has to win at another’s expense. Once you factor in fees and charges, you’re almost certainly better off indexing instead.
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