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Active Equity Management - the Great Debate

Over the last year, there has been an increased focus on whether active management can beat passive over the long-term. After examining recent relative returns and the impact of fees, an increasing number of investors have been defaulting to an index approach.

But how should institutional investors make this call, and how can they assess which active managers are likely to create long-term alpha? Listed below is a selection of twelve papers that we have selected as likely to help investors making these decisions:


Active versus Passive - How you can get on base? (Segal Rogerscasey, Apr 2016)
In this paper, CIO Tim Barron examines the ongoing debate between active and passive management. He highlights the benefits and drawbacks of both strategies and seeks to help institutional investors understand how to calculate the probability that active or passive strategies will outperform, and how to decide which approach is best for them.  

Keys to improving the odds of active management success (Vanguard, Nov 2015)
The authors argue that although active management can be a difficult strategy, there are three key factors that improve outperformance probability: low cost, patience, and top talent. Low cost continues to be seen as the key factor that has proven, with some level of consistency, to improve the odds of investor success with both indexed and active funds.

The tide turns against active management (The Economist)
Asset management is growing fast and yet the prospects for many asset managers is gloomy. This article by The Economist newspaper examines the ways in which the industry is being disrupted by lower cost competition, as well as the broader challenges facing large industry players.

Can Active Management Make a Comeback? (2015)
The investor community has been preoccupied with the question of active-versus-passive investing. In the construction and management of investment portfolios, the roles of active vehicles and passive products are being closely examined because active managers, particularly in the U.S. all-cap and large-cap segments, have found benchmark outperformance to be difficult in recent years.

The Case for Index-Fund Investing (Vanguard, Apr 2015)
Index investing has grown rapidly since its introduction in the 70s, because it provides a low-cost way of gaining investment exposure to a wide variety of equity benchmarks. This 19-page document from Vanguard analyses in detail the track record and performance-persistence of active managers, comparing this performance with that of passive funds.

Hallmarks of Successful Active Equity Managers (Cambridge Associates, Apr 2015)
While there are no silver bullets in active equity manager selection, some managers have generated attractive long-term performance that exceeds both their benchmarks and management fees. This 20-page document highlights key characteristics to look for and has a particular focus on active share, portfolio concentration, tracking error, and assessing the diversity of industry factor risks.

There are too many active managers (Towers Watson, June 2015)
It is clearly rational for an individual investor to hire an active manager to try and do better than all other investors. In the same way that it is rational for one person to graze an extra cow on common land. This unfortunately leads to an escalation in competition and an assured conclusion that is a societally-sub-optimal.

Going passive is still an active decision (Russell, Mar 2016)
Passive investing is gaining traction among defined contribution plan sponsors. Three experts met to discuss some of the legal and investment issues facing plan sponsors considering such a move. This paper provides the highlights of the conversation.

Active vs. Passive Investment Management Marketing Practices (Corporate Insight, 2015)
This white paper examines the websites of 18 asset managers, constructing a benchmark and comparing the firms' strengths and weaknesses.

Multifactor Indexes: The Power of Tilting (FTSE Russell, 2016)
In recent years, institutional investors have become increasingly convinced of the benefits of factor investing, facilitated by the creation of a variety of indices, each focusing on a specific risk factor. The creation of these new indexes has allowed investors to access factor exposure efficiently and at low cost. However, as with any investment strategy, the return from a single-factor index will vary over time, often following different patterns. For instance, the quality risk factor tends to exhibit counter-cyclical performance, whereas the payoff from the value factor normally follows a more cyclical pattern. This paper examines alternative processes for building multifactor indexes, in order to benefit from a diversified exposure to the various source of factor return.

Is Smart Beta just Monkey Business? (EDHEC, 2015)
The “Monkey portfolio” proposition is that smart beta strategies can be deployed naively, with the assurance that all such strategies will add value. Edhec's research suggests otherwise, with many smart beta strategies having exposure to other factors. The authors warn that care is needed to avoid over-extrapolating the implications of a specific test specification of a smart beta strategy into a wider setting.

Not All Active Managers Are Created Equal – What to Look For And Why (2015)
The notion that active fund management acts as a negative-sum game is challenged in this paper. One potentially significant uncorrelated source of investment return is the reward for the selection of exceptional managers. The authors look into numerous key factors that create sustained active investment performance, including conviction, contrarian thinking and concentration, adherence to proven investment philosophies and processes, capacity awareness, the incorporation of ESG considerations, patient investment approaches, and possible even gender.

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