As the chart below shows, top quartile active managers can and have outperformed over time.
(Source: FactSet, Standard & Poor’s, FTSE Russell, J.P. Morgan Asset Management)
Thirdly, certain asset classes like emerging markets or small cap equity tend to be “less efficient” and top managers are more likely to outperform their appropriate benchmark over time since not all categories are similar. Also, knowing when to fire a professional manager is sometimes harder than hiring a new manager, since temporary underperformance may be a short term phenomenon. Pulling the trigger too soon can often times lead to regret as you see a manager rapidly recover and speed on to the top of their peer group again.
So, if we can find an active manager that is outperforming his or her benchmark consistently over time, after their fee has been factored in, why settle for a passive strategy that is cheaper but the returns are lower and exposed to more market risk due to an inattentive buy and hold approach?
Past performance does not guarantee future results. Diversification and asset allocation do not guarantee investment returns and does not eliminate the risk of loss.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Tom Fleishel and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
Upside/Downside Capture Ratio – A measure of a manager’s performance relative to the broad market benchmark during
periods of market strength/weakness.
Alpha – Alpha is used as a measure of a manager’s contribution to performance due to security or sector selection. A
positive (negative) alpha indicates a portfolio was rewarded (penalized) for the risk taken above that of the market