Many scientific papers show that only very few fund managers actually achieve positive alpha (net of expenses) over a longer period of time.
Most notably, research by Olivier Scaillet, Professor at the Geneva Finance Research Institute, finds that many fund managers generate positive alpha by luck alone. He, among others, analysed the monthly returns of 939 European open-end equity funds between 2001 and 2006. Only 27.8% of the funds generated alpha and the proportion of skilled funds was only 1.8%.
Passive Management as an Option
Passive investing is, of course, a valid alternative. However, experts around the world are increasingly questioning the role it would play in a bull market. In the latest memo from highly-regarded Howard Marks, co-chairman of Oaktree Capital, he again makes interesting comments on the role of passive investing in the markets. However, he does not go quite as far as Steven Bregman, co-founder of U.S.-based investment adviser Horizon Kinetics, who thinks that the shift away from active investing and towards passive strategies and indexing has created the greatest bubble ever.
Active Management and Positive Results in Q1 & Q2 2017
Marlène Hassine, Head of ETF Research at Lyxor Asset Management, has very good, recent research on this topic. The first two quarters of 2017 have generally been favourable for active managers — notably during the 2nd quarter — in the area of Europe Small Caps, Global EM Equity, Value Equity, World Equity, and UK Equity.
Positive Results for Passive Management Q3 2017
On the contrary, Q3 2017 was a good quarter for passive management as macroeconomic stability and persistently low volatility provided limited alpha opportunities. Hence, in some markets and at certain times, you may indeed be better off with low-cost indexing instruments.
Balance Is Key
Of course, it goes without saying that active decisions always play an important part in asset allocation and portfolio construction.
At IAP, we believe that both have a decisive role in successful asset management, and we will find the right mix for you.