Considering the Arguments for and Against Actively Managed Funds in DC Plans – Plan Sponsor

Earlier this month, the CFA Institute Research Foundation published a “guidebook” that has drawn a significant amount of criticism in the investment community. Active Investment Managers and those who support their work, including the Active Managers Council were quick to point out the flaws in the self-styled “guide for plan sponsors.” This guide by the CFA Institute relies on outdated, flawed narratives about active management and disregards the new thinking, role and benefits of active management. Simply put, the industry deserves a guide for plan fiduciaries that reflects this new thinking.

The guide, titled “Defined Contribution Plans: Challenges and Opportunities for Plan Sponsors,” suggests that focusing on passively managed funds in retirement plans will make life less complicated for fiduciaries.

Weighing in on the active versus passive management debate, with a focus on fees, from the perspective of target-date funds (TDFs)—which hold the majority of participant assets— was Maddi Dessner, head of global asset class services at Capital Group. In the article for Plan Sponsor, Dessner indicates that “while cost is one lens through which plan fiduciaries need to evaluate investment managers, it’s not the only thing to consider.” She says, “plan fiduciaries also need to determine what investors will receive in returns net of fees…cost is a limiting way to consider active versus passive management and what value participants will receive.” 

Active Management Leader Urges Focus On Long Term – Financial Advisor

Ravi Venkatarman, Chair of the Active Manager’s Council and Global Head of Investment Solutions for MFS, offers a new perspective on measuring the performance of active managers, and how best to frame the conversation with individual and institutional clients.

“The measurement of success of an active portfolio manager should go beyond just whether the investments get good, immediate returns,” said Venkataraman.

“It also should include a reorientation to the long term, how well the manager assesses sustainability and the relevance and value of insights and advice the manager brings to the table.”

In an effort to help advisors guide the performance conversation with clients, Venkataraman shared MFS’s approach which some may describe as (encouraging) a subtle shift in investor behavior.

With the support of their own board, MFS has reversed the way portfolio success is measured, according to Venkatarman.

MFS focuses first on 10-year history, then five, three, and one. Psychologically, “this shift is a big deal. It prompts the nature of the investment conversation to change. We tell advisors and clients to look at the long term first, which anchors the conversation around drivers of long-term value, performance and risk.”

In addition, examining an active manager's "quality of performance" is also important, he said.

“Metrics such as results over rolling seven-year periods, up-market and down-market performance [and] risk factor exposures are all prompts for rich client conversations. You may expect a good manager to outperform the benchmark by 100 to 200 basis points annualized over the long term, but you also want to look at how he or she got there."

Is ESG Investing A Form Of Active Management? – Financial Advisor

Last month, Simon Hallett, Chair of the Council’s Research Task Force sat down with Financial Advisor to discuss the inherently active nature of sustainable investing.

What transpired was an active discussion (pun intended) about the unmistakable merits of the active approach to addressing ESG factors, and the importance of marrying an individual’s investment goals with his/her social views.

“A fully active approach to ESG investing allows for a nuanced consideration of a wide range of quantitative and qualitative factors, which helps advisors tailor portfolios to their clients' sustainability goals,” commented Hallett.

According to Hallett, advisors and their clients are faced with challenges only an active manager is prepared to meet.

Assets in sustainable funds continue to grow, and with that growth have come some misperceptions. Investors are faced with confusing lexicon, the disparity of ESG ratings, and subtle differences within the marketplace; all of which require careful navigation and ultimately, the involvement of an active manager.   

To learn more about why the active approach to ESG investing is optimal we encourage you to read the Council’s research paper, Sustainable Investing is an Active Process.

Active Funds Are Doing Better. This Is What’s Helping Them. – Barron’s

Through July, 48% of active funds had beaten their Russell index benchmarks for the year to date—above the average and the best showing in four years, writes Savita Subramanian, Bank of America’s equity and quantitative strategist.

Managers don’t seem concerned about inflation and they’ve been “persistently overweight in stocks benefiting from stay-at-home trends and more modestly weighted in those linked to the economy reopening post-Covid. But they have reduced their positions in both in August,” writes Barron’s.

Passive investors haven’t done that poorly. The S&P 500 is up more about 20% year-to-date, but Subramanian is bracing for a decline through year-end.

While these comparisons between active and passive funds are inevitable, and subtle in this particular article, it would be careless not to point out that it’s a common narrative that ultimately does investors a disservice. Most investors have significantly longer time horizons. As such, short-term assessments of both active and passive funds may just be misguided.

So, while we applaud the fact that active management is experiencing a resurgence, and we appreciate knowing what may be behind the performance figures, industry veterans may argue that measuring performance over only 1-2 quarters may not be prudent, and comparing passive to active unnecessary. Instead, the focus should lean more towards a longer-term horizon and how both strategies benefit investors.