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Failures of Active Management

Most traditional investment providers offer actively managed investment products as the solution to their clients’ needs. This means picking individual stocks and timing the market with the goal of beating an index or benchmark.

Failures of Active Management – Kurt Laubinger from GuideVine on Vimeo.

This has helped Wall Street firms earn higher fees in their sales force. There’s typically incentive to offer active strategies because of the high commissions they earn as a reward for selling them.

Let’s take a look at the facts. Here’s a chart depicting the performance of active equity managers over a given time frame. You can see it doesn’t matter whether it’s large cap, small cap, or international.

Most of these active managers fail to outperform their benchmark. The statistics are compelling. The idea that superior intellect or better stock-picking prowess offers better returns does not play out in real life.

Even more compelling is the fixed income slide. Again, with many different asset categories covered here, most of these active managers failed to beat their benchmark.

These results change from year to year, but the theme is the same. Each year, 60 to 70 percent of active managers fail to beat their benchmark. The ones that do are not the same ones from year to year, and trying to figure out who will outperform next year is even more difficult.

If investors can perform in the top 30 to 40 percent of managers on a regular basis by owning the benchmark instead of trying to beat it, they will find themselves floating closer and closer to the top of performance charts.