The rise of passive investing has been undeniable over the past decade. Bombarded by the argument that most active investment managers cannot predictably beat the broader market, investors have shifted to low-cost index mutual funds and exchange traded funds at the expense of funds that are actively managed.
Yet a new academic paper, written by Russ Wermers, Ph.D., a finance professor at the University of Maryland's Robert H. Smith School of Business, argues that investors benefit from active managers in a way that’s often overlooked. Wermers examines the activities of active managers and how they contribute to the efficiency of the public markets.
“All investors, both active and passive—as well as the real economy—benefit from the efforts and cost expenditures of active managers,” he writes.
The new paper, called “Active Investing and the Efficiency of Security Markets,” was supported by the Investment Adviser Association’s Active Managers Council.
Active managers’ activities that contribute to a more efficient market include their correction of market mispricings, the intraday liquidity they provide and their incorporation of news into market prices.
“The average ‘alpha’ provided by active managers (meaning the excess return above the relevant benchmark index), even gross of management fees, does not adequately capture the value of the active management industry to capital markets,” Wermers writes.
