Pages Menu

Posted by on Aug 11, 2009 in AdvisorShares, Investment Perspective

Add a Little Active In Your Life

There is a great story by Sam Mamudi on MarketWatch.  It is based on a study by FundQuest that looked at the returns of thousands of actively managed funds from the start of 1994 to the end of 2008.  The study found there are some categories in which the majority of actively managed funds beat their benchmarks: for example, in foreign small- and midcap growth, more than 75% of active managers came out ahead. By contrast, fewer than 25% of intermediate government bond funds beat their index.

There are several interesting quotes about the results…”The less efficient the market, the more potential there is for a manager to add value,” said Jane Li, manager of investment management and research at FundQuest, a consulting firm and unit of BNP Paribas . “Emerging markets [for instance] have fewer analysts and research while it’s very hard for active managers to find an advantage in U.S. large-caps.”  also this quote… “Active management is more beneficial in areas where information is hard to come by, such as small-caps, international and emerging markets,” said Michael Walliser, manager of corporate services at Martinsville, N.J.-based investment adviser Condor Capital Management Inc.”

There were a few interesting responses to the results of the active manger study…  Vanguard’s Kinniry takes issue with looking at performance data to judge manager selection.  “Past performance is not a good indicator of future performance,” he said… and this quote…Russ Kinnel, director of mutual-fund research at Morningstar Inc., said the FundQuest study’s findings were “very useful” but he said that past performance shouldn’t be used to assume future results.

Note that Kimmel did go on to say he uses some actively managed strategies in his personal portfolio (read the article in the link below).

This seems to be the best response… Walliser said that his firm uses a mix of passive and active investing. For instance, indexing is especially useful in the aggregate bond and large-cap stocks areas, he said, while his firm doesn’t use any index-linked funds in the small-cap space. In the midcap space, the firm allocates one-third of assets to indexed-linked funds, actively managed midcap growth funds and actively managed midcap value funds.

We would add diversify, diversify, diversify.  Indexes can be used with active management, where you can find a good active manager, use them, use several, same for indexes.  Your manager selection and asset allocation should be managed.  Invest like institutions do, multiple managers and investment styles for each asset class, when a manager under performs when they shouldn’t, you can fire them, for index usage, you can increase or decrease your exposure to it if necessary.

Create a stock chart with Bershire, GE, and the S&P 500 (GE and Berkshire are basically actively managed funds).  You can make the argument taking equal weight exposure to each of these would be a great allocation for your large cap exposure.  With Berkshire, you would have under performed in the tech growth, out performed when that bubble burst, both GE and S&P have been impacted by our housing and credit bubble, Berkshire has managed that challenge more successfully……. diversify.

Read the marketwatch story: