There's a line of argument in the financial press that suggests that active money management is dying, a victim of high fees and underperformance versus low-cost indexing that captures average market returns.
Newsflash: This is anything but the case. Active investing still dominates asset management around the world, and less than “18 percent of the global stock market is owned by index-tracking investors,” according to a 2017 BlackRock Inc. analysis. That is a modest share and a clear sign that active asset management still dominates the industry.
Despite my being mostly in the low-cost, passive camp, I have not been convinced yet by one of my favorite researchers, Jim Bianco, that active asset management is "no longer a viable business model."
Indeed, there are many niches where active managers can prosper.
The history of investing is, by definition, the history of active management, for the simple reason that indexing didn't exist until relatively recently. If we use mutual funds as a proxy, we see that active management was the only investment methodology for almost the entire past century.
I have discussed some of the issues confronting active managers recently. It is reasonable to expect active management to continue to morph into something different from what it is today. The question before us is what active fund management is likely to look like in the future.
A bit of context: The mutual-fund concept traces back to the Netherlands in the late 18th century. In the U.S., pooled investments emerged in the late-19th and early-20 centuries. Massachusetts Investors Trust traces its history back to July 15, 1924, and is still in operation today, managed by MFS. Vanguard Group’s Wellington Fund was founded in 1929. Broad diversification, daily liquidity and professional management were the main attractions for investors.
Two caveats to consider: I presume we will continue to see fees decline and lower costs across the board for investors. Indeed, I have made the claim that active versus passive debate is really a debate over expensive versus cheap.
Consider the following five areas as potentially the future of active-stock management:
1. Quant driven funds: The ability to sift through enormous amounts of data to identify where performance gains might be found has attracted lots of attention. Some have called it the future of Wall Street; others, the future of asset gathering. Regardless, the underlying technology continues to drive lots of bold and innovative investigation. From natural language analysis of social media to scraping satellite data of shipping movements to other alternative data sources, this is an area that continues to experiment with new ideas.