Active ManagementForbes columnist Ken Fisher recently wrote: “Whatever you read lots about is surely priced in and easily ignored.” I couldn’t agree more. Barron’s January 12, 2015 cover story “ Return of the Stockpickers” argued that a rising interest rate environment would favor active management. The article cited a study by Nomura Securities, which analyzed the period 1962 to 1981 when the 10-year note yield tripled. The study's finding: “The median cumulative return for large company mutual funds was 62% better than the S&P 500.”
Chance to OutperformI have no idea if either of those will happen again. But now that the market has tripled from its 2009 low I think things will settle down a bit and active managers will have a better chance to outperform. As Barron’s noted in its story, more than a quarter of the Russell 2,500 companies had negative net income in 2014. Owning those kinds of names is not a formula for long -erm investing success. Broadly speaking, most clients want to participate in up markets and preserve capital in down markets. In other words, for most clients, beating an index is not the goal.
Yale StrategyAs I see it, the best answer to “how to outperform an index” I know of was provided by David Swenson, Yale’s Chief Investment Officer. According to him, managers need to:
- Know the overall environment
- Run concentrated portfolios
- Do extensive research on investments so as to know when a sell off is a buying opportunity
- Have patience
- Be willing to deviate from the index
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