Earlier this month, S&P Global released its SPIVA US Mid-Year 2022 report, which highlights the state of active management and its performance against its benchmark. Despite this being its best year yet, the report found that 51% of active large-cap fund managers underperform.
And over the long term, the deficiencies increase even further: 84% are below average after five years and 90% after 10 years.
“The function of any market is to find the right price and make it available to people who want to buy or sell,” Charley Ellis, author of “Winning the Loser’s Game,” told CNBC’s Bob Pisani on Monday on ETF Edge.
“When I graduated from Harvard Business School in 1963, there were no investment management courses. Now it’s seven,” he added. “And the trading volume on the NYSE was 3 million shares, now it’s between 6 and 8 billion shares per day.”
Ellis said the increase in the number of people actively involved in investing over time, coupled with better access to market knowledge, has made it easier for investors to trade professionally themselves.
“Every time you go into the market as an active manager, you’re buying and selling to other people who know exactly what you know, just as fast as you know it,” he said. “It makes it terribly difficult to get ahead of others.”
Amidst the current volatility, which is influenced by a number of factors, the markets are particularly unpredictable, regardless of the information an investor is privy to.
“It’s important to remember that efficient markets theory does not say that markets are priced correctly every day,” said Nick Colas, co-founder of DataTrek Research, in the same segment. “It says there is no reliable way to find the mis-rating, and that’s still true. And that’s why active management is so difficult.”
Colas said there is no consistent way to determine outperformance versus benchmarks, so it is up to individual investors to create their own strategies or seek an active manager to back them up.
“Every great investor has a phenomenal idea,” he said. “A phenomenal idea that no one believed in for a long time. And that has come true.”
While active management may be better suited to tedious strategies like bond market gambling, the lines between active and passive are becoming increasingly blurred.
“Passive management doesn’t really exist,” said Colas. “Everything, including buying an index fund, is still a decision. These decisions are influenced by emotions and that’s something we struggle with a lot.”
When it comes to index funds, Colas also advised against taking active management for granted. He said he encourages clients to look at longer-term trends on a global scale.
For example, Colas recommended comparing the S&P and Russell indices to emerging market ETFs. EFA and EEM have risen 3% a year for the past 10 years, he said, and the S&P has risen 10% over that period.
“We recommend an underweight position [EFA and EEM] as dramatic as you can take,” Colas said. “Because these are not money-making areas and under the current structure, they never will be.”