Active management, fees, and the asset management industry

Do active managers show skill and beat their respective benchmarks? The data one years of study provide a clear answer. For most managers, there is no skill. Managers do not earn their fees, yet you will be hard pressed to find many managers that will argue that they do not have skill. Markets may not always be efficient but they certainly are competitive and the cost of trading is real. Many managers are paid vast sums to believe that they have skill or they at least have the potential to beat the markets. Hence, the great quotes from Saul Bellow and Upton Sinclair both of whom spent time in rough an political city of Chicago.

One of main drivers of the factor and smart beta revolution is how to gain consistent return without having to engage in active management or pay high fees. The Fama-French framework tells us we can use a simple factor framework to better characterize risks relative to a simple benchmark. Smart beta focuses on the fact that rules-based investing can do better than the alternative of discretionary active management.

The advances of finance place an even higher border on active managers to show that they are able to generate value. The value proposition within the asset management industry may just be focused differently than what was expressed years ago. The value of "active management" may be in the structure of risk management and risk factor weighting and not picking stocks. The payment for stock picking may have to switch to payment for risk management and dynamic allocation decisions.