Another rough 12-month stretch for active portfolio managers is giving advisors even more reasons to present themselves as something more than stock pickers and emphasize expertise in tax planning and other services.
In the year leading up to June 30, only 27% of active managers of large-cap stocks — shares of companies with $10 billion or more in market value — beat passive funds designed simply to mimic widely cited indexes like the S&P 500,
In the decade leading up to the end of June, active funds beat passive only 13% of the time on average.
With stock pickers so often lagging behind low-cost passive funds, Randy Bruns of the RIA Model Wealth says he's "shocked" by the number of advisors who still go in for active portfolio management.
"We have decades of evidence showing how difficult it is to consistently beat an index after fees," Bruns said. "And Morningstar's latest numbers are simply more evidence of that."
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Passive investing overtaking active management
The tradeoff for the higher fees charged by active managers is usually supposed to be higher returns. But, perhaps in response to the steady reports of lackluster performance, investors and advisors have been moving money out of actively managed funds in recent decades.
Passively managed ETFs and mutual funds, both commonly used to track indexes, held $21.88 trillion in the U.S. by the end of June,
Bruns said he thinks active management continues to have so strong a foothold in part because "large banks and brokerage firms create their own products and have armies of financial advisors incentivized to sell them." But active managers do have defenders among advisors.
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Active management does better with small-, mid-caps
Monica Dwyer, a wealth advisor and vice president at Harvest Financial Advisors in West Chester, Ohio, said her firm doesn't pay outside portfolio providers for active management but does actively manage some investments on its own. She noted that many index increases in recent years have been driven by just a relatively small number of tech-related companies.
Semi-conductor manufacturers, in particular, have been responsible for much of the gains. Beating the S&P 500 in such circumstances would require a higher-than-usual concentration in those tech-related companies. But most fiduciary advisors would by leery of so heavy an exposure to just one industry.
"Our portfolios have a lower concentration in technology because of our concern over a potential AI bubble," Dwyer said. "But we are still in line with the overall S&P 500 return [year to date], which means our performance relatively speaking is excellent."
Michael McMeans, the president of Silverling Financial in Columbus, Ohio, said active managers also can be helpful in picking investments for which there is relatively little public data. Large-cap companies tend to be the most followed and analyzed.
Small-cap companies, worth between $250 million and $2 billion, and mid-cap, worth between $2 billion and $10 billion, tend to receive far less scrutiny. When active managers tended to firms in those categories, their success at beating their passive counterparts rose to nearly 50%, according to Morningstar.
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Private markets and the need to move beyond stock-picking
Private investments, which often are under no requirement to publicly report data, present an even bigger opportunity to active managers, McMeans said.
"Firms are staying private much longer, and that means there is a lot more work to do in determining what to own," he said.
Regardless of whether active management works in certain cases, results like Morningstar's suggest advisors need to present themselves as something more than investment pickers.
"The real value of working with a financial planning firm is increasingly in tax planning, retirement income strategy, Social Security and Medicare decisions, and estate planning," Bruns said. "There are areas where good advice can actually make a measurable difference."
