Article: Active Alpha in Volatility Debunked

LewisBraham

Worth reading: https://etf.com/sections/features-and-news/active-alpha-volatility-debunked
One common misperception I think is that active managers will do better in down or volatile markets, but this article and others I've seen indicate that is not the case.
I also think the longer a bull market goes on, the harder it is for active managers to sidestep downturns because there is such intense pressure to hold the market's favorite stocks. There is huge career risk for managers who don't follow the herd and it gets worse the longer the bull market lasts. So when the downturn occurs, many managers end up holding the same five or ten beloved stocks and take it on the chin.

bee

Chart in the article:


Seems to point out that active management has a very low alpha add when it comes to Global Emerging Market across all time frames. Maybe just buy the index VWO, VEIEX, etc

msf

Not directly on point but worth keeping in mind is that active share is only a measure of how many stocks held by a fund are not identical to stocks in its benchmark index. So a 100% active fund could hold Pepsi instead of Coke, UMC instead of TSMC, etc.

IOW, active may mean less than one thinks, especially when it comes to overall market behaviour as opposed to tweaking around the edges.

Observant1

High active share was once touted as a desirable attribute for actively-managed funds.
Some people claimed that funds with high active share would outperform.
Alas, this has not occurred largely for U.S. equities over the past decade or so.
John Rekenthaler from M* provides the details here.

Charles

@LewisBraham

"I also think the longer a bull market goes on, the harder it is for active managers to sidestep downturns because there is such intense pressure to hold the market's favorite stocks."

Beautiful!

Yes, in latest commentary, both Grandeur Peaks and Seven Canyons lamented they stayed too long when valuations were "obviously" stretched.

It's always easy ex-post!

Derf

Grandeur Peaks : I'm happy I took dividends & CG's in cash instead of reinvestment last year !

Is it time to use that cash for a little dipping ?

FD1000

Good post. The longer you check, and I'm talking about at least 20-30 years, a cheap index such as the SP500 beats most stock funds.
The SP500 is based on the best indicator, the price. The price never lies, regardless of any opinion.
The SP500 is global too, it gets about 40% of its revenues from abroad.

Sven

That is what Warren Buffet said about S&P 500 index fund.

Observant1

FD1000 said:

Good post. The longer you check, and I'm talking about at least 20-30 years, a cheap index such as the SP500 beats most stock funds.
The SP500 is based on the best indicator, the price. The price never lies, regardless of any opinion.
The SP500 is global too, it gets about 40% of its revenues from abroad.

The S&P 500 index is a good representation of large-cap U.S. stocks.
Most active funds underperform this index over longer time periods.
Although many S&P 500 companies derive substantial revenue from foreign countries,
it may be prudent to also include foreign-domiciled companies in your portfolio.
I respect Warren Buffett and Jack Bogle but disagree with their views to avoid foreign investments.

FD1000

Observant1 said:

FD1000 said:

Good post. The longer you check, and I'm talking about at least 20-30 years, a cheap index such as the SP500 beats most stock funds.
The SP500 is based on the best indicator, the price. The price never lies, regardless of any opinion.
The SP500 is global too, it gets about 40% of its revenues from abroad.

The S&P 500 index is a good representation of large-cap U.S. stocks.
Most active funds underperform this index over longer time periods.
Although many S&P 500 companies derive substantial revenue from foreign countries,
it may be prudent to also include foreign-domiciled companies in your portfolio.
I respect Warren Buffett and Jack Bogle but disagree with their views to avoid foreign investments.

I have heard the above many times. Why stop at foreign-domiciled companies? Why not slice it 8 ways, just to be sure. This is why many investors lag by complicating their portfolios. The fact is that the most dominated companies are in the SP500 + the USA is very stable + capitalism is not perfect, but still the best we have + I prefer American management globally. China high tech looked great until Xi Jinping took care of that. Europe have been sinking for years. Did you know that there is no European high-tech company by revenue at the top
(link).