Active Management has Returned

The year of 2016 stood as a horrendous year for active fund managers, with long/short equity funds posting abysmal returns that trailed the S&P 500 index by a considerable margin. The slump has even infiltrated a handful of prominent hedge funds with a track record of performance the likes of Steve A. Cohen and Bill Ackman, who saw little upside last year on account of minimized volatility and the emergence of more sophisticated investing techniques employing higher level mathematics.

However, following renewed interest in trading activity on the backs of optimism in light of the Trump administration, various active fund managers have been posting higher returns. One such notable investor, Bill Miller of Miller Opportunity Trust, a $1.4 billion asset management firm, has been up 7.5%, pushing his fund up to 21% in the past 12 months, due mostly on account of his holdings in key financial sector heavyweights such as Bank of America Corp. and JPMorgan Chase & Co. Yet Mr. Miller is not alone in his gains, as some 45% of all actively managed US funds have beaten their benchmark indexes as of Feb. 28, according to Morningstar.

Though much of these rallies owe their success on the backs of the Trump administration they are not simply blind sentiments, rather business and fund managers alike have attributed Trump’s plan for lower taxes and fewer regulations as an attempt to revitalize American business by returning a greater bottom line per quarter. As such, many investors believed such actions have the potential to be realized within a Republican held Congress. Thus many anticipate the flow of money to start redirecting from lower-cost ETFs and into actively managed funds that offer the promise of higher returns in exchange for slightly higher fees. As Mr. Miller noted, “Active managers are getting a little more confidence, and maybe reaching out a bit more.”

According to Morningstar, the last year a majority of active funds beat their benchmarks was 2009, a drastic shift to the 31% of actively managed funds beating their benchmarks in today’s generation. Though this resurgence in the markets have boded well for investors and pension funds who receive a return on invested capital, the resurgence has served to better bolster the crippling health of the asset management industry which has recently suffered due to the emerging popularity of passive investing either through technologically savvy AI traders and the relatively riskless ETF being churned out by large mutual funds the likes of Vanguard.

In the recent outperformance of active funds, those that have chosen to specify their trading objectives to one specific industry have led the pack ahead of traditional long/short equity and systematic trading strategies that seek to capture small minute price movements. Furthermore, fixed-income funds and traders have also done well, with 54% beating their benchmarks on account of greater yield curves prompted by the FED’s decision to raise interest rates and expressing interest to continue doing so for another two or three times this year.  

According to. Rob Sharps, co-head of global equity at T. Rowe Price Group Inc., “It’s to be determined if this is the dawn of a new era or not, but the odds that it might be are the highest they’ve been since the financial crisis.” As such, the shift in performance from negative to positive for active fund managers and diverted pressure previously felt on behalf of fund managers who began contemplating lowering fees, merging with competitors and even closing shop amidst lackluster returns. Dan Chung, chief executive and chief investment officer at Fred Alger Management, noted that “The last five to seven years have been very difficult markets for active managers, and especially growth managers.”

Yet while many praise the resurgence of the markets and fund management’s, some investors have taken a pessimistic view on the future of trading and applications to financial markets, whereby promoting passive investing over active fund management. Blackrock, one of the world’s largest financial firms, most recently gutted a large portion of their active equity unit to focus on more quantitative computer-driven models that aim at sifting through financial data to make meaningful investment decisions.  

As such, though this boom of active fund managers may appear as a change from traditional slumps, buyers must be wary as to the future of the industry and the likelihood of active vs passive management.

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