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  • Home>Research & Insights>Fund Times>Have Active Managers Given Active Management a Bad Name?

    Have Active Managers Given Active Management a Bad Name?

    If truth be told … yes.

    John Rekenthaler, 10/24/2017

    The Debate
    Two weeks back, Barry Ritholtz of Ritholtz Asset Management and Nir Kaissar, a Bloomberg columnist, discussed the merits of active versus passive investing. The debate's outcome was a foregone conclusion; these days, few if any investment writers wholeheartedly support active management. They either recommend passive investing fully or they advocate blending the two approaches, typically by starting with a core of passive investments and then adding active funds as desired.

    Ritholtz and Kaissar each chose the latter path. Each also suggested that active management be mostly in the form of strategic beta. That is, they maintained that instead of trading securities freely, as active fund managers traditionally have done, managers should use investment strategies that follow mechanical, preset rules. The ideas are human, but the execution is a computer's.

    The strategic-beta approach has the advantage of costing less than traditional active management. It's not clear to me that the underlying expenses are all that different between the two forms of management, because both traditional investment approaches and strategic beta require a qualified fund manager and both often use similar amounts of in-house research. But strategic beta is generally offered through exchange-traded funds, and the convention is that ETFs underprice mutual funds.

    Self-Inflicted Damage
    This is all familiar, but what was different was Kaissar's comment that "active managers have given active management a bad name"--a phrase enthusiastically echoed by Ritholtz, who responded, "I may have to steal that for a column title." (Too slow, Barry. When it comes to intellectual larceny, you're competing with a master.)

    Let's examine their claims. Kaissar and Ritholtz state that active management has done itself a disservice in two ways:

    1. They charge "absurdly high fees."
    2. They encourage bad shareholder behavior by "waving shiny objects" at prospective buyers.

    I halfway agree.

    Cost Controls
    There's no question that active mutual funds charge aggressively. Historically, the industry has combined lofty employee salaries with high profit margins. Unlike firms in most other industries, fund companies don't go bankrupt. (The rare exceptions being firms that suffered major regulatory problems.) Once they hit a certain size, they either make huge profits or--if things go badly--large profits. All major fund companies could slash their fees without endangering their survival.

    However, there are a couple of rebuttals.

    is vice president of research for Morningstar.