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Stock Volatility Won't Save Actively Run Funds, Bernstein Says

For active managers to outperform, someone else must do badly, Sanford C. Bernstein's Robert Van Brugge said, and historically that’s been retail investors.

By Rachel Evans

(Bloomberg) --Mutual-fund companies counting on a return of stock-market volatility to revive interest in actively managed funds should look elsewhere, according to Sandford C. Bernstein’s top executive.

After suffering years of outflows as investors channel more and more of their money into cheaper indexed products, some managers welcomed a return of price swings and last year’s market plunge as the beginning of better times for stock pickers. Robert van Brugge, Bernstein’s New York-based chief executive and chairman, says that’s a mistake.

“I’m not sure it’s going to hold,’’ said Van Brugge earlier this week. “Given a lot of active managers underperformed, I’m not sure it’s necessarily going to mean that active managers are going to be big beneficiaries.’’

Cheaper passive funds have gradually eaten away at the money in active strategies over the last decade, with assets in indexed funds focused on large-cap stocks overtaking their active cousins last quarter, according to data from Morningstar Inc. Performance is at least partly responsible -- fewer active managers beat the the S&P 500 gauge of U.S. stocks in 2018 than a year earlier, despite its worst year in a decade.

For active managers to outperform, someone else must do badly, said Van Brugge, and historically that’s been retail investors. But with many mom-and-pop investors replacing individual stocks with passive exchange-traded funds that deliver the broad market returns, doing better than these investors has become tougher for active managers as a whole, he said.

Sandford C. Bernstein has been a vocal champion of active management over the years, memorably describing the rise of passive investing as worse than Marxism in a 2016 paper. But the brokerage surprised many a year later when it started two ETFs backed by passive benchmarks -- albeit measures based on Bernstein’s stock recommendations.

Despite the headwinds, Van Brugge remains bullish on the future for active managers that can weather the indexing storm.

“The passive disruption is essentially shaking out some of that excess capacity and hopefully the more skillful managers will be able to do OK,’’ he said. But “I wouldn’t try to make a bet on active managers as a class.’’
 

 
To contact the reporter on this story: Rachel Evans in New York at [email protected] To contact the editors responsible for this story: Jeremy Herron at [email protected] Dave Liedtka

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