Here’s Where Active Management Actually Works

An analysis of active management performance over the last ten years reveals the strategies where active managers have most often beaten indexes.

(David Paul Morris/Bloomberg)

(David Paul Morris/Bloomberg)

It turns out there are worse strategies for active managers to pursue than U.S. large-cap stocks.

Over the past ten years, asset managers focused on large American companies have actually done a better job of beating their passive benchmarks compared with active managers who invest in U.S. small-cap stocks. And both large-cap and small-cap active strategies have fared far better than active managers dealing in U.S. high-yield bonds relative to indexes, according to a review of active management performance by consulting firm Wilshire Associates.

As part of the review, Wilshire analyzed how well active managers performed against passive benchmarks over the one-, three-, five-, and ten-year periods ending in December 2018. To directly compare the pure investment performance of active and passive strategies, the consulting firm only looked at gross returns, which are higher than what investors actually earn as they don’t account for the fees charged by asset managers.

“Once accounting for fees, we would expect average active results to trail passive indexes,” the firm stated in the report.

Although last year was shown by the review to be a bad year for active managers across the board — with only U.S. growth strategies, real-estate investment trusts, and core and high-yield U.S. fixed-income managers beating passive benchmarks before fees — the decade as a whole was largely positive for active managers, who outperformed their indexes in nine of the thirteen strategies analyzed by Wilshire (at least before fees were taken out).


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The best strategy for active managers over the last ten years was emerging markets, closely followed by developed markets outside of the U.S. and Canada. In both of these asset classes, 90 percent or more of active managers in Wilshire’s universe outperformed the relevant MSCI indexes over the ten-year period. Last year, however, only about a third of ex-Americas developed market strategies bested passive indexes, while roughly 44 percent of emerging markets managers out-earned their benchmark.

The active managers that performed best relative to passive investments last year were fixed-income managers, with about 86 percent of core U.S. fixed-income strategies beating the Bloomberg Barclays U.S. aggregate bond index. High-yield active managers also did well last year, with about 70 percent of them outperforming their Bloomberg Barclays benchmark.

It was a rare win for high-yield managers: Over the last ten years, only 13 percent of active managers targeting U.S. high-yield did better than the index — again, before fees. Core U.S. fixed-income, however, proved a winning strategy for active managers over the longer period, with about 70 percent of them out-earning their passive counterpart.

Other winning strategies for active management over the last ten years included real-estate investment trusts — where active beat passive roughly 86 percent of the time — and small-cap strategies focused on developed markets outside of North America, where active managers won about 85 percent of the time.

Whether or not any of these strategies will continue to work out for active managers over the coming decade is another question entirely. As Wilshire emphasized in its review, “there is virtually no evidence of manager consistency” over time.

“Successful use of active management cannot solely rely on picking past winners,” the firm stated.