“We active folks have done a terrible job of outperforming the benchmarks.” That’s Nuveen Investment’s Bob Doll wildly understating the degree to which mutual funds and actively managed ETFs have underperformed the S&P500 (^GSPC) over almost any timeframe since the advent of index funds. To take one of many data points, over the last 5 years 77% of large cap actively managed funds have underperformed the S&P500.
Doll says this is finally the year when active managers start making up for lost ground. In the attached clip, Doll makes his case that 51% of active managers beating the market in the 3rd quarter was the start of something big.
His argument starts with the high correlation between stocks over the course of the rally of the last 5 years. More than 400 of the 500 members of the benchmark S&P rose last year. Active management is based on the idea of discriminating between companies and industries. When everything moves in the same direction any fees and friction lead to underperformance.
Another positive spin is the natural selection that’s taken place over the last few years among active managers leaves the best of breed available for your dollars. A culling of the herd in active managers leaves two kinds of players in existence: those who can pick stocks and those who can market funds.
Doll says it’s up to the investors themselves to do the legwork on who it is that’s running your money. “You need to know who it is managing, what the process looks like, and what the consistency over time has been,” Doll says. “If you can get good answers on those questions you can raise your odds over 50% that your active manager can win.”
Disclaimer: Merrill Lynch is not responsible for the editorial content of this program.
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