According to a growing consensus among investors, active money managers are costly anachronisms, consistently underperforming passive investment vehicles such as index funds and ETFs, as well as computerized trading algorithms. The result has been a steady stream of investable assets migrating from active to passively managed accounts. (For more, see also: Passive Funds are Killing Active Money Managers.)
Nonetheless, reports of the demise of active stock picking may be greatly exaggerated, to paraphrase Mark Twain. Specifically, active management has been staging a strong comeback in terms of relative performance, Barron's reports.
Weathering the Recent Storm
Defenders of active management have predicted that it would outperform during market declines, or during periods of heightened volatility, per Barron's. The markets have experienced both recently, so what's the result? Almost 76% of actively managed U.S. value funds in the large cap and mid cap subcategories have exceeded their benchmarks so far in 2018, according to Jeffrey Ptak, global director of manager research at fund-rating service Morningstar Inc., as reported by Barron's.
Overall, about 56% of active managers have beaten their benchmarks for the year-to-date through February 9, while roughly 53% outperformed during the selloff period from February 2 through February 9, per the same sources. Indeed, during that selloff period, about 66% of both large-cap value managers and small-cap growth managers exceeded their targets, indicating how broad-based the comeback among active managers has been, across investment themes.
The Investopedia Anxiety Index (IAI) has been registering extremely high levels of worry about the securities markets among our 27 million readers worldwide. The figures above suggest that active management may have been a prescription for lower anxiety than passive management recently.
Best Year in a Decade
In 2017, roughly 75% of large cap value managers beat their benchmarks, the largest proportion in a decade, also per Morningstar and Barron's. However, since value investing did far worse than growth investing in 2018, Barron's notes that this was a low hurdle to surpass, and many of those active value managers who beat the benchmarks did so by sprinkling some tech stocks in their portfolios.
To be sure, it would be premature to predict a reversal of the long-term trend toward passive investing, based on recent results. Passive and rules-based quantitative investing strategies now account for about 60% of all equity assets, roughly doubling in the past 10 years. Meanwhile, discretionary investment managers now generate less than 10% of all equity trading volume, per recent data from JPMorgan Chase & Co. (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)