Stick with active management claims US manager
Investors should not shift away from active management toward passive strategies with recent poor performance by the former a result of exceptional market conditions and poor discipline among managers according to a US funds management group.
In a whitepaper released by Epoch Investment Partners the group has claimed that while markets have gained almost 75 per cent since 2011 and index funds have outperformed more than three quarters of active managers these events "did not take place in a normal economic environment".
Epoch stated that according to data provided by Standard & Poor's, earnings for the index only grew by a cumulative total of just under 15 per cent over the three years from 2011 to 2014.
According to Epoch the remainder of the growth was the result of "a huge expansion in the market's price/earnings multiple" which was equal to 51 per cent of the index's total return. This was spurred on by quantitative easing which caused lower-quality stocks, typically avoided by active managers "to outpace better-quality stocks for three years".
Epoch also stated that cash holdings by active managers, necessary for redemptions and trades, also dragged back active manager performance over the past three years which seemed to be unable to take advantage of the market conditions of the past three years.
"We take the view that this is an indication that many of those managers are not following a disciplined enough investment process. A disciplined manager, alert to his own biases and careful to correct for them, can still find ways to capture the inefficiencies in the market," the whitepaper stated.
"But even the most skillful active managers will sometimes underperform. And in some market environments, most active managers can be expected to underperform. The market conditions of the last three years, in which unorthodox monetary policy sent a flood of liquidity into the capital markets, pushing up low-quality stocks faster than high-quality stocks and magnifying the drag from holding cash, created just such an environment."
AUTHOR
Jason Spits
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