Actively Managed Funds Provide a Better Return for Investors

Actively managed funds rely on a single or a group of management teams to outperform the market. It has been around for a long time, dating back to the history of industrialisation and strategic resource utilization. Successful managers are more likely to keep their employment than those who did not meet their goals, because investors want to make money, not lose it. Index funds have recently acquired appeal as a result of the risk associated with investing in actively managed funds (Tom Anderson). Investors earn a high return on actively managed funds when by chance the investment achieve profitability and the active managers will also benefit as a result since they will have achieved their benchmark. Dynamics in the stock market will influence if the investor will earn a high return or not after taxes and other fees are excluded. Fidelity Investment have prepared Actively managed funds that entail arguments of continuous analytical research, forecasts, practice, and experience to make informed decisions in the market sector (Fidelity Investments). These decisions are on what investment decisions to partake, what securities to manage and how to actively follow up the market. On the contrary passive management also called indexing is based on trying to match the benchmark of a performing fortune. It is by buying and holding all the investments to match the reference. Passive management seeks to better the returns (Pandey).

One question that an investor should ask is why they should invest in actively managed funds. In any investment, there are benefits as well as limitations involved. For actively managed funds, the benefits include leaving all the trouble to the fund managers and the investment will be in different markets and sectors. Some of the limitations include having high charges as compared to passive funds and having a high possibility of underperforming since the funds were invested in a specific market (Tom Anderson). As Tom notes in his article, investors have been pulling off their funds and investing in index funds and this has been mainly attributed to the financial crisis. Active managers have also been performing poorly and the dominance of the market by index funds have made actively managed funds to experience more hiccups. To explain further about the situation, the author uses Dunn’s law which states that an asset class performing well, index funds will perform even better. An analysis by Morningstar showed that active managers success rates have suffered in the short term because the value of stock in the market has been performing well in the recent times. The situation has been different especially for investment in active stock for emerging market which has made active managers achieve long-term success (Tom Anderson). In 2011 for instance, Tom indicates that index funds were able to gather $140 billion more than what was collected by actively managed funds. In 2015, the situation was not different as index funds became stronger and gathered $576 billion more than actively managed funds. Investors seem to be preferring index funds as compared to active funds as since there is low fee charged and the investment seems to be stable hence guaranteeing returns in the long term.

According to Pollock’s article of 2015, with active management, investors seek the opportunity to outperform benchmarks set by previous investments. However, such managers come in with higher expense since it is expensive to hire renowned active fund managers. Active fund managers research extensively on the market trends and can confidently analyze trends thus being flexible to the changing conditions. It goes a long way in managing fluctuations and protecting investments. Actively managed funds thrive in situations where the previous management is inefficient. With analytical prowess, these managers produce outstanding profits after sealing loopholes of inefficiencies and return higher from invested stocks and bonds (Pollock).

The discussion of actively managed funds and investment has been phenomenal in building the global economic giants like the United States, European Union, and China. Ravi Shukla has established a convincing analysis on the issue of active portfolio managers. He largely embarks on the effect of falling short of reaching excess returns. “The analysis of 2004 identified how managers of active monies claim to be superior investment skills and creation of positive returns” (Ravi Shukla). He closely monitored and revised how several organizations in the United States responded to the conditions in the Market. “It is counterproductive to tell investors that index funds are desirable as compared to active funds” (J.J. Zhang). Though investors have been pulling out of actively managed stocks, the situation can change anytime as active funds only require the right choice to be made when choosing actively managed funds. According to Zhang, every year, actively managed funds fall short of their benchmark as compared to passive funds and he sees index funds as mundane but their concept has been tried and have been proven to work, unlike active funds. He states that passive funds have low expenses, highly diversified and will have a minimum turnover and it is difficult to find in active funds with such characteristics though can be achieved (J.J. Zhang).

According to Buttonwood, Gary Player, one of the greatest golfers of his times, was quoted saying the harder he practices, the luckier he gets. This belief practiced in active management is based on continuous research, experience and analytically processing investment ideas to better the investment fortunes (Buttonwood). “Outperforming managers are measured by the success in their career” (Buttonwood). It may come either early in the profession or later. It is quite difficult to always produce consistent performance in bettering investment outputs. Veteran managers perform better than new managers since they understand the market dynamic better and the risk involved. “Even in trying market times, the talents of active managers should now come to play and ensure benchmark is achieved” (Daniel Solin). Daniel argues that poor transparency and data insufficiency can be one of the factors making active managers in the United States to underperform recently as compared to those in the international market.

In support of that, Charles Ellis, a long-term investment consultant explains his views on why it is hard to outperform the market benchmarks. He argues that 50 years ago, only 10% of the trading on the New York stock exchange was by trading institutions which currently is at 95%. Selling in large stocks gives a harder challenge to beat the benchmark. Mr. Ellis identifies that it was an expectation from investors that a good performing manager should always advance by a percentage point every year. “It is important to utilize both active and passive forms of investment management” (Charles D Ellis). Many actively managed funds have disappeared in the past ten years which makes it hard to identify the factors that lead to outperformance of actively managed funds and only two out of ten funds will survive when considering factors such as taxes into consideration (Daniel Solin). Hence, the argument about index funds and active funds will always be there as investors have had other preferences for investment options. In the 20th century, active funds were performing relatively well and investors were enjoying the returns but the situation seems to be changing. Lee questions if success in active management is a skill or luck and people can argue the question differently based on their experiences (Lee McGowan).

Research by Kremnitzer shows that active managers are expected to manage risks proficiently. It is because of their vast experience and extensive research beforehand that would make them achieve success. Their forecasting skills should be imminent and be able to foresee, analyze and tackle risks in time. “They can explain risks and deviate from the expected index thus restructuring their plans to focus on most profitable investments options” (Kremnitzer). Psychological arguments such as “Lake Wobegon effect” explains why investors always expect their managers to be above average and still should reinvent their strategies to outperform their scales. All investors want is to make profits from the investments they have made inactive funds either on a short-term or long-term benefit. Active managers can then forecast, research and make decisions on the investments to hold, sell or buy while hoping they will achieve success. As Chris and Madison reports, a high percentage of actively managed funds have been underperforming both in the United States and in the world according to figures by S&P Dow Jones. More pressure is on the active managers as they are trying to succeed in this evolving market and have the challenge of convincing investors to invest in their active funds as opposed to passive funds (Chris and Madison).

In conclusion, not all active managers will always deliver a return to the investors and high return will be because of proper decisions on the investment to be made. The comparison between active and passive management will forever linger as each has their own advantages and disadvantages. Reasonable targets such as annual percentage increase should be considered annually. Passive managed funds style of targeting benchmark outputs means reasonable expenses and costs are involved. With higher goals such as those of actively managed funds, buying and selling of securities is higher. In addition to that, actively managed funds incur higher trading costs. Hence the output from the investments is not a sure outperformance of the target once all expenses are deducted. Raised concerns are on high costs of operations and higher risks involved, reviews on the managers’ performance should be on average annual outperformance for a long tenure rather than on seasonal investments.

Works Cited

Buttonwood. "Practice Makes Imperfect." The Economist (2014). .

Charles D Ellis, CFA. "In Defense of Active Investing." Financial Analysts Journal 71.4 (2015).

Chris, Newlands and Madison Marriage. “99% of actively managed US equity funds

underperform.” Financial Times (2016). https://www.ft.com/content/e139d940-977d-11e6-a1dc-bdf38d484582

Fidelity Investments. Mutual Funds. 2017. 1 November 2017. .

J.J. Zhang and Daniel Solin. “Is There a Case for Actively Managed Funds?” The Wall Street

Journal (2015). https://www.wsj.com/articles/are-index-funds-really-better-than-actively-managed-1425271058

Kremnitzer, Klemens. "Comparing Active and Passive Funds Management in Emerging Markets." 2012.

Lee McGowan. “Index Funds vs. Actively-Managed Funds.” The Balance (2017).

https://www.thebalance.com/index-funds-vs-actively-managed-funds-2466445

Pandey, Megha. "Comparative Study of performance of Actively Managed funds & Index Funds in India." International Journal of Research in Education Methodology 8.1 (2017).

Pollock, Michael A. "The Case of Actively Managed Funds." Wealth Management (2015).

Ravi Shukla. "The Value of Active Portfolio Management." Journal of economics and business

56.4 ProQuest.Web. 15 Sep. 2013. (2004): 331-346

Tom, Anderson. “Investors say 'forget it' to active funds.” CNBC (2016).

https://www.cnbc.com/2016/08/29/investors-say-forget-it-to-active-funds.html