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What We’re Reading Now

What We’re Reading Now

February 15, 2019

Periodically on this blog we will share a collection of some of the articles we’re reading that speak to the active and passive “debate,” and that help to propel the conversation. Here’s a selection of recent articles we find helpful to the discussion.

Market Turbulence Spurs Demand for Fledgling Active ETFs

Rocky markets have been a boon to active managers in exchange-traded funds, an industry long synonymous with the rise of passive investing. So writes Asjylyn Loder for The Wall Street Journal.

Actively managed ETFs drew a record $27.5 billion in new investor cash in 2018. At the same time, inflows to passive ETFs slowed for the first time in five years. It appears rocky markets have started changing investor perceptions and have investors thinking beyond plain-vanilla indexing.

“The human element of active ETF management is appealing to investors who are getting skittish when markets are volatile,” said Todd Rosenbluth, director of ETF and mutual-fund research at CFRA.

The popularity of active fixed-income ETFs has helped shift investor perceptions of the industry as a purely passive one, Mr. Rosenbluth said.

It appears “the lines have blurred,” according to Rosenbluth. “We’re seeing more large active managers enter the active ETF space.”

Market downturn puts spotlight on active management

In his January 2, 2019 column for InvestmentNews, Jeff Benjamin highlights an often-overlooked benefit to actively managed funds – their ability to hold cash, something index funds are not able to do. Focusing on the recent stock market volatility, Benjamin looks to several viewpoints with respect to risk management.

“”When people buy index funds, most of them don’t know what they’re giving up in exchange for the low fee,”” said Barry Mandinach, executive vice president at Virtus Investment Partners. “”They’re taking on a valuation- and quality-agnostic approach to investing. And that’s like driving a car with no brakes, which is fine if you’re only going uphill.””

In times of market volatility, Todd Rosenbluth, director of mutual fund and ETF research at CRFA points out that “active management is getting paid a premium to keep you from losing too much ground. They can go to cash, they can raise cash, and they can buy on the dips, whereas index funds have to track the index.”

Dennis Nolte, vice president at Seacoast Investment Services, said cash management is the secret weapon for most active managers.

“”If a fund holds cash and is highly correlated to the S&P 500, it’ll outperform during down markets,”” he said.

“”The longer the stock market becomes challenging, the more the active fund manager takes measures, whether right or wrong,”” he added. “”One thing they certainly do is run with higher cash levels. Just that alone can help reduce fee drag. Active managers will also often reduce beta in a portfolio to reduce risk if they don’t want to raise cash.””

Active And Passive: A Look Under The Hood

In this article for Financial Advisor magazine, Claus te Wildt, senior vice president of capital markets strategy for Fidelity Institutional Asset Management, takes a closer look at headlines (and research) driving the focus on increased passive inflows. His article uncovers some interesting takeaways for advisors to think about as they “consider striking a balance within their investment vehicles.”

His first surprise: Most of the studies compared actively managed vehicles to indexes. And “much of the research we encountered focused on one asset class—U.S. large-cap equity—with the assumption that the results must be true in every other asset class as well.”

That led to his first takeaway: “You cannot invest in an index. So, when you do your own research, it is important to compare actively managed vehicles with investable passive ones, not just with indexes.”

His second takeaway: “the importance of evaluating each asset class separately.”

And finally: “consider the current, and potential future, market environment.”

“Today’s advisors,” te Wildt writes, “face increasing pressure to meet investor demands and build portfolios that minimize cost and generate the most value. Passive investing has many benefits, like broad market exposure at a lower cost—but it’s also important to consider tailored strategies to drive growth and outperform the market.”

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