A Dose of Reality for Active Managers

A Dose of Reality for Active Managers

Active managers have come under a lot of pressure lately as numerous studies and press reports point out passive investments beat active management, especially when fees are taken into account. Alan Brown, a senior advisor with U.K.-based asset manager Schroder’s says that active managers should focus more on managing to "real-world" outcomes and not that of an index.

“We should acknowledge that whether you’re an institution or an individual, at the end of the day, what you really want is a positive real rate return after all the fees, charges and taxes,” Brown said Thursday at a media event in New York.

Brown says there’s a “kernel of truth” in criticisms that active mangers are not worth the money investors are spending on them. “Here’s where I think the industry’s made a mistake—we have got ourselves into an arm wrestling game where, a lot of the time, a fund manager will be asked to outperform a benchmark index, let’s just say the S&P 500, and we know that is, for the industry as a whole, a negative sum game,” he says.

Almost all holders of U.S. equities will out clear the S&P 500, but then have to subtract the transaction costs and other costs from their gains, decreasing the money investors actually pocket at the end of the day.

“And if you look at the roller coaster ride of markets in the last 10-5 years, even if you earned market return, you’d still have delivered a pretty unpleasant outcome to your client,” Brown adds.

Yet despite their faults, Brown argued that active managers are better than the alternative: investors trying to manage their own portfolios. The average investor’s returns have historically been lower than a managed portfolio because individuals succumb to the oldest investment bias in the book: Fear and greed--they buy when the market has gone up and sell when the market is down, Brown says. 

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