A new study has concluded that active investment management doesn't get the credit it deserves for helping portfolio performance.
The study consisted of a review of academic literature by three college professors and involved a review of about 300 academic articles and other sources.
"Taken as a whole, our review of current academic literature suggests that the conventional wisdom is too negative on the value of active management," the authors wrote.
The study was conducted by professors Martijn Cremers of the Mendoza College of Business at the University of Notre Dame in Notre Dame, Ind.; Jon A. Fulkerson of the University of Dayton in Dayton, Ohio; and Timothy B. Riley of the Sam M. Walton College of Business at the University of Arkansas in Fayetteville, Ark. The project was supported by the Investment Adviser Association's Active Managers Council, which promotes active management in the investment community.
The authors noted that over the past 20 years there has been a gradual shift away from actively managed mutual funds toward passively managed indexed funds. Less than 8 percent of the assets in equity funds were passively managed in 1997, but that rose to 40 percent in 2017, they wrote, adding that the average fee paid by active fund investors dropped by about 20 percent over the same period.
They also pointed to a landmark study in 1997 that concluded that data did "not support the existence of skilled or informed mutual fund portfolio managers." That led to the conventional wisdom that active management does not add value to investment performance.
The professors, however, said their research uncovered numerous studies that supported the idea that active management can in fact boost investment performance.
The study looked mainly at U.S. equity mutual funds, as well as other asset classes, including bond funds.
"Active managers have a variety of skills and tend to make value-added decisions, such that, after accounting for all costs, many actively managed funds appear to generate positive value for investors," the professors wrote.
The study found that active managers can add value to investing through stock-picking and market-timing skills. Other skills come into play as well: a manager’s understanding of corporate oversight and tax management, his or her effective handling of information and the maintenance of a disciplined investment approach.