Fidelity: Amid Pandemic, Advisors Rebalance, Look at Active Investments – Barron’s

Fidelity recently surveyed 468 advisors and found 41% of financial advisors were looking to increase clients’ allocations of active investments. Fifty-seven percent planned to increase exposure to U.S. stocks. When advisors made changes to client portfolios, the No. 1 reason was rebalancing.

"Advisors are taking a proactive approach to managing client portfolios through a big crisis. In times of volatility, advisers lean on active management to manage through those cycles, especially when you hit inflection points in the business cycles," commented Matt Goulet, SVP in portfolio solutions at Fidelity Institutional.

One Sign That Outperforming Active Managers Will Continue to Outperform – Institutional Investor

It’s a common disclaimer: past performance is not indicative of future results. However, new research may be putting that adage to the test. A new study from Notre Dame professor Martijn Cremers and co-authors Jon Fulkerson of the University of Dayton and Timothy Riley of the University of Arkansas suggests that past performance may indeed be “indicative of future returns – at least among certain high-performing active managers,” writes Institutional Investor.

The study focused on a sample of roughly 3,300 actively managed separate accounts investing in U.S. equities between July 2007 and June 2016.

“Managers do not need skill to deviate from their benchmark and obtain a high active share,” the authors wrote. (Active share refers to how much the stocks in a manager's portfolio differ from those in the index.) “It does, however, take skill to manage an outperforming high active share portfolio over a long period of time.”

Institutional Investor wrote: “Based on this logic, the authors analyzed the performance of the highest-returning separate accounts. They found that portfolios in the top-quintile of past performance subsequently delivered alpha of just 0.25 percent per year. Looking at only separate accounts with high levels of active share — those ranking in the bottom 20 percent for beta exposure — the researchers calculated future alpha of 1.48 percent per year.”

They found no evidence of outperformance among separate accounts that hugged their benchmarks.

“This result suggests that strong past performance alone is insufficient for subsequent outperformance — a manager must also be highly active,” said the authors.

This study was not the first time professors Cremers, Riley and Fulkerson weighed in on active management. They have done extensive research on the topic, most recently in the fall of 2018 when they published a review of the academic literature on actively managed mutual funds titled, “Challenging the Conventional Wisdom on Active Management.” Originally published in 2018 and sponsored by the Active Managers Council, their paper was later published by the Financial Analysts Journal in January 2019.

The paper had two overarching themes:

• First, contrary to the current consensus, active managers can predictably add value for investors on a risk-adjusted basis.
• Second, traditional approaches to selecting active managers – which consider past performance, investment approach, manager characteristics and the investment environment – have validity because they can identify skill in advance.

Taken together, they confirm that the continuing investor commitment to active management is entirely rational.