This is a summary of a panel discussion from the MMI 2013 Spring Convention held in NYC on April 22-24.
John Thompson, Partner, Head of Investment Solutions, Hewitt EnnisKnupp
Ed Foley, Director, Dimensional Fund Advisors
Brian Hansen, President & COO, Confluence Investment Management
Robert G. Smith, President & CIO, Sage Advisory Services
According to the Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard:
The year 2012 marked the return of the double digit gains across all the domestic and global equity benchmark indices. The gains passive indices made did not, however, translate into active management, as most active managers in all categories except large-cap growth and real estate funds underperformed their respective benchmarks in 2012. Performance lagged behind the benchmark indices for 63.25% of large-cap funds, 80.45% of mid-cap funds and 66.5% of small cap funds.
Performance returns over the past five years clearly show that active management has had a tough time, Smith opined. While many more fixed income managers beat their indices, equity managers tend to do better during rising markets. Maybe equity managers could take after fixed income and do more sector rotation, he pondered.
According to Hansen, there is a lot of “closet” benchmarking going on. These managers are going to have a harder time trying to outperform over time. Confluence believes that it’s better to do research and locate undervalued stocks for long-term payouts than to try and mirror the index. They do have an ETF strategy group that exclusively uses passive benchmarks, he noted.
DFA maintains a blend between active and passive management, Foley explained. Research shows that performance from active management is driven by a mixture of skill and luck. The question is, how do you separate the skilled managers from the ones who were just lucky? Also, can you structure portfolios around reliable premiums, he asked?
What are some long-term investment aspects that your firm is focusing on?
Sage offers three broad investment strategies; active fixed income, structured products, and tactical asset allocation using ETFs, Smith reported. He believes that the hot button strategies going forward will most likely be global tactical active allocation, multi-asset income, and fixed income strategies that take advantage of ETFs on an opportunistic basis. They avoid buy and hold strategies, which failed in 2008 when the financial crisis effectively changed “core plus into core minus”, he joked.
DFA started in 1981 and have always had close ties with the University of Chicago, Foley explained. Their philosophy on building portfolios is encompassed in three principles; 1) Markets reflect all information available to buyers and sellers, 2) portfolio structure determines performance and provides significant contribution to how performance is generated; and 3) diversification, he said. Continue reading