The market rallied strongly last week. There are reasons to expect the rally to continue into the year end: market seasonality, buybacks, cautious sentiment and positioning and reduced bond supply from the US Treasury. It may also be, though, that too many people now expect a strong finish to the year, which could work as a dampening factor.
The Financial Times published an article on the weekend asking why there are still active asset managers.
The background to the article is that many sophisticated investors put a large part of their portfolios into cheap index funds, because research has found that the majority (90%) of actively-managed funds underperform the market in the long run.
This statistic is commonly cited, but it may not be the whole story. The article points out that outside the US, active managers have beaten the index by around 1% a year before costs.
Management fees eliminated most of the outperformance, however.
So it is not that active managers are bad investors as such; more that they charge investors too much to justify their fees.
This may provide an opportunity for services like eToro’s CopyTrading, which charge no management fees. (Of course, eToro charges other fees as per the fee list.)
Overall, my reading of academic research into the performance of mutual funds and hedge funds is that the market is not fully efficient: investors make mistakes and the smart money can beat the market by taking advantage of those mistakes.
The historical before-cost outperformance of active funds cited in the Financial Times article is one piece of evidence. What kinds of funds tend to outperform is another. For example, smaller funds, more active funds, funds run by individuals from poorer backgrounds (who had to work harder to get a fund manager position), and funds run by more intelligent managers all tend to outperform.
Thus, I believe the answer to “why there are still active asset managers” is that chosen correctly, with the costs managed, they can add value to investor portfolios.
Peruvian bank Credicorp was sold after negative revisions to Peru’s 2023 GDP forecast. After the sale, the company revised its earnings guidance lower, causing the shares to fall. Credicorp was replaced by Bradesco, a Brazilian bank.
JPMorgan was replaced by NatWest. I think the latter has more upside after its shares fell 30% this year.