Is Active Management Primed for a Comeback?

Let’s party like it’s 1995.

Active management and old-school stock picking could be poised for a comeback after nearly 30 years of passive dominance. Higher interest rates, greater stock dispersion and heightened volatility are providing the “key ingredients” for active investors to potentially outperform markets, according to T. Rowe Price. In fact, the tide may be turning, with active management becoming more important than ever, said Monica Dwyer, CFP with Harvest Financial Advisors. “Portfolio management is the unsung hero of our RIA,” she said. Passive investing can even lead to “diworsification,” when portfolios become too broadly diversified and returns suffer, she added.

Kick It Old School

For a long time, wealth management was about beating the markets and finding alpha that ordinary investors couldn’t find on their own. But over the past two decades, financial advisors have placed greater emphasis on financial planning, thanks to the adoption of model portfolios and the popularity of passive investing. These approaches not only provide healthy returns, but also free up time for advisors to focus on services like tax, estate and long-term care planning, as well as budgeting and cash flow analysis. Many believe this holistic model is key to building stronger client relationships and staying competitive.

But advisors are starting to realize that doesn’t mean investment management is less important today, it has just become simpler and more automated. Many advisors now outsource portfolio construction:

• Assets in model portfolios reached nearly $8 trillion in April of this year, according to Broadridge Financial Solutions. 
• More than eight in 10 fee-based advisors use models for at least some of their client assets.

Active investing, by contrast, is notoriously difficult. Over the past 15 years, roughly 90% of active funds have underperformed the S&P 500. But that doesn’t mean advisors aren’t taking advantage of the current market conditions. Kimberly Abmeyer, founder of Abmeyer Wealth Management, said her clients’ portfolios are outperforming the S&P 500 by 10% so far this year, thanks to targeted stock selection. 

“We’re opportunistic investors focused on high-quality companies and fiscally responsible management teams,” she said. “It’s not necessarily done with the intent of outperforming, but just trying to find the right opportunities and sectors to focus on.” She added that active management can also reduce costs by cutting out third-party fees.

It’s a Tough Job. Still, active investing isn’t for everyone. “It’s a tough task, and people can try it, but it usually doesn’t end quite as well as they expect,” said Don Bennyhoff, founder of Bennyhoff & Co. and former senior investment strategist at Vanguard. He noted that model portfolios frequently get unfairly labeled as “cookie cutter,” when in fact, real alpha often comes from helping clients find tax efficiencies. “Those are things many advisors overlook, and probably should emphasize more, instead of trying to beat the market,” he told Advisor Upside.