Brown: We ran a quick test to gauge how badly an investment manager would perform by “chasing returns” and investing each year in the active fund that had performed the best the year prior. Surprisingly, this strategy outperformed simply staying in the passive investment for the whole period. We still don’t recommend this strategy, but it made a good point about experienced active managers’ ability to keep a winning streak going.
Hortz: What does this say to you about the need to keep doing quality research and continuously challenging conventional wisdom and assumptions?
Brown: It’s a long-held belief that a contrarian approach leads to alpha and beats the market. While active management isn’t necessarily a “contrarian” strategy, it certainly feels that way of late, with so many investors opting for index funds.
It’s important to continuously conduct research, test new strategies, and challenge your own biases because, as our study shows, market conditions change often, and sometimes quickly. A “buy and hold” strategy can serve an investor well, but tactical shifts that preserve capital are even better.
Hortz: What are your recommendations to advisors on how they should think about and respond to this research?
Brown: Our recommendation is that advisors continue to think critically about their research process and how that process adds value to their clients. Our research and conclusions show that, while passive investing has been able to deliver meaningful performance, active investing still has a place in investors’ portfolios.
It’s an advisor’s duty to stay informed on all of the investing options that are available to a client and keep an open mind. Being aware of changing tides, and which asset classes or strategies are poised to outperform, can help advisors deliver more value to their clients.
The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors—Pershing, Voya Financial, Ultimus Fund Solutions, Fidelity and Charter Financial Publishing (publisher of Financial Advisor magazine). For more information, click here.