Active Management Strategies

The philosophy behind the active management strategies is that since 39% of actively managed equity mutual funds outperformed their benchmark indexes based on 5 year returns ending 2015 according to Morningstar, then with proper screening and research, such as completed by Callan Associates, it is possible to identify those 39% that can potentially beat the indexes. In fact, Callan Associates’ exhaustive 20 year study completed in late 2009, found that on average, the actively managed mutual funds they screened outperformed their respective indexes on a pre-fee basis, with the following annualized outperformance: Midcap funds by 0.71% per year; Smallcap funds by 4.78% per year; International funds by 2.85% per year; and Emerging Markets funds by 1.8% per year.

In “The Equal Importance of Asset Allocation and Active Management” from 2010, Ibbotson & Associates studied 10 years of returns for more than 5,000 mutual funds in order to measure the relative importance of asset allocation policy versus active portfolio management. Ibbotson’s results found that the three most important factors in seeing returns over time were:

1) patiently investing to allow “market movement” for potential growth (75%);
2) designing an asset allocation strategy with non-correlated asset classes (12.5%); and
3) active management of the portfolio (12.5%).

Besides potential outperformance reasons, here are additional reasons that investors may prefer active management strategies over passive indexing strategies:

• Many investors prefer to own stocks or bonds where fund managers are watching when to buy and sell them, versus simply holding a large number of stocks in an index that include all “the good, the bad, and the ugly.”
• Many investors object to being forced to invest in down-trending sectors of the economy within an index, and prefer more active management based on the trends.
• They may object to investing in a portfolio that includes low-quality companies, those losing money or are in bankruptcy, those in businesses that offend them, are in overly-competitive businesses, are poorly managed, do not pay dividends, etc.
• They may prefer an advisor to focus on their own unique set of objectives, adopting a strategy that reflects their own set of values, investment criteria and tax circumstances.
• They may prefer to entrust managers with the authority to carry meaningful cash positions under certain conditions, unlike indexes that are always fully invested.

At CMR, we have a disciplined research approach to ensure our clients remain invested with quality money managers, based on 12 specific quarterly screening and scoring methodologies. We utilize numerous research sources, including Callan Associates, to select those actively managed investments with a good short-term and long-term record of above-average results, a solid investment philosophy and strategy that has been practiced successfully and consistently for years, along with rigorous risk and fee controls. We work diligently to identify, retain and then closely monitor these managers, fulfilling our fiduciary responsibility to only keep in the portfolios what are in our clients’ best interests.