The active/passive management conversation doesn’t have to be a debate. Those are better left to the politicians. As MFS Co-CEO Michael Roberge says in his October 18 opinion piece in the Wall Street Journal, investors can choose both. And they may want to consider that, given the potential diversification benefits of having active alongside passive in their portfolios.
With active management facing criticism of late, Mike sheds some light on the rhetoric and how to recognize a manager with skill. He also makes a compelling case for active’s risk management capabilities and the importance of excess return in an environment fraught with return-generating challenges.
Investors know this. In a recent survey conducted by MFS, nearly three-quarters of professional investors surveyed in the US cited strong risk management as an important criteria when selecting actively managed investments
So passive has its place. Active has its advantages. And there are some real merits to a “bipartisan” portfolio. Here’s what Mike has to say:
- It is true that flows into passive strategies have picked up. But U.S. advisers are still allocating 70% of their clients’ assets to active investment strategies, according to our recent survey.1 Investment flows can be fickle and aren’t always a good barometer for long-term shifts in sentiment.
- Most of it points to the average active manager’s inability to consistently beat their benchmark, net of fees. And while that might be true for average managers, there are skilled active managers who have consistently outperformed their benchmarks over a full market cycle. But how do you distinguish between skilled and average? It really comes down to conviction and risk management.
- Investors caught in the active/ passive debate need to under- stand the issues—but stay focused on the outcome. Market returns might look appealing. Excess return will matter more. And managing the downside is essential. Long term, the bipar- tisan portfolio probably wins.