401(k) Specialist Issue 4 - 2016 - 28

401(k) INVESTMENTS
F
orgive active managers for feeling discouraged-the headlines, and
fund flows, aren't going their way.
" More Pain for Active Management, " " Active vs. Passive: Who's
Winning? " [take a guess] and simply " Active Funds Need Help " are
just a sample.
" Assets continued to exit active U.S. equity funds, with an estimated $24 billion
in outflows in September, slightly down from August's $25 billion, "
Morningstar announced in a recent monthly release, reflecting a trend of similar
announcements for the seemingly umpteenth time.
" Passive U.S. equity funds attracted steady
flows, with an estimated inflow of $19
billion in September, up from August's $16
billion, " it added in a twist of the knife.
And it's not simply inside baseball, but rather
reported in the consumer press as well.
" The presiding argument for investing
in index funds and passive exchange-traded
funds is simple: They tend to cost
less and perform better than their active
counterparts, " CNBC recently reported to
its armchair-investing viewership.
The case for passive strategies is wellknown
and well-documented, with academic
research from Nobel Laureates at elite
universities ready to silence dissenters. Indeed,
investing behemoth Vanguard, Kool-Aid sipping
Dimensional Fund Advisors and a host of
others have built extremely successful business
models simply by following an index.
It's easy to see why.
The SPIVA U.S. Mid-Year 2016 Scorecard,
which compares indices with their
active counterparts, found 85 percent of
large-cap managers, 88 percent of midcap
managers, and 88 percent of small-cap
managers underperformed the S&P 500, the
S&P MidCap 400 and the S&P SmallCap
600, respectively.
" The figures are equally unfavorable
when viewed over longer-term investment
28 ISSUE 4 2016 | 401kSpecialistmag.com
" PUT SIMPLY, ACTIVE MANAGEMENT CAN AND DOES ADD
ALPHA OVER TIME. IT'S ALL IN HOW IT'S STRATEGICALLY
USED, AND HOW THE MANAGER BEHAVES. "
horizons, " it further explained. " Over the
five-year period, 92 percent of large-cap
managers, 88 percent of mid-cap managers,
and 97.58 percent of small-cap managers
lagged their respective benchmarks. "
It was pretty much the same story for a
10-year investment horizon.
Not bad for a strategy that legendary
Vanguard founder John Bogle claims was
called un-American when first introduced
in the 1970s (forget the 70s, a recent research
report from Sanford Bernstein that
called passive investing " worse than Marxism, "
according to The Wall Street Journal's
Holman Jenkins).
So is that it? Game over for active managers?
Time to pack it in and go home?
Of course not, except maybe for those
on the extremes of the taste great/less
filling-style argument that active vs. passive
has become. Even the aforementioned
Vanguard, the reigning champ (by far) of
passive investing, offers active products, with
one third of the firm's assets currently in
active funds.
Put simply, active management can and
does add alpha over time. It's all in how it's
strategically used, and how the manager
behaves.
Those are big caveats, according to Tom
Howard, CEO of AthenaInvest.
Also known as Dr. C. Thomas Howard,
formerly of the University of Denver, he's
got some academic heft of his own, and finds
that part of the problem is that 401(k) platforms,
in particular, " demand closet indexers. "
" They want name brands with high assets
and attractive investments, " he bluntly, and
emphatically, states. " It leads to what we call
the Portfolio Drag Index, which consists of
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401(k) Specialist Issue 4 - 2016

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