The Active Money Manager Model No Longer Works

“Active money managers have underperformed benchmarks for far too long in one of the greatest bull markets in history,” according to a recent article in Bloomberg.

As a result, the article reports, assets continue to flow toward passive investing strategies, “a shift that is shaking up markets in a not-necessarily-good way.” It adds that today’s top students are forgoing the financial services industry in favor of lucrative tech jobs, compared to 2006 when about 12 percent of MBA students were pursuing investment banking compared to 7 percent in tech.

While the article notes that higher market volatility might help some active managers, it adds that investors will need proof of outperformance before shifting away from passive investing.

In order to compete for today’s investment dollars, Bloomberg argues that active managers will have to “create highly idiosyncratic and concentrated portfolios.  They will have to find the one thing they do well and do it in a concentrated, risk-seeking way, whether it be health care, emerging markets, macro themes, algorithms, technology or trading.” However, it points out, many active managers do the opposite, focusing on amassing assets and hugging indexes. “This model is no longer viable,” the article states, adding, “In Wall Street parlance, active managers cannot generate enough alpha to justify the higher fees over passive/ETFs.