In recent years, the active investment management industry has taken a beating in the financial press and at the hands of the exchange traded funds market. That is partly an issue of the press putting too much emphasis on returns instead of focusing on risk-adjusted returns, but also a result of bad investment management.
There is no doubt it is a tall order for investment managers to beat the large-cap U.S. indices on a return only basis. This is especially true if you are running a big mutual fund that doesn’t have the agility to move into or out of positions without incurring meaningful market impact costs. On a risk-adjusted basis the task is still difficult, but not as skewed in favor of the indices.
In global equity markets, the evidence shows that active management adds value. The Financial Times reports that actively managed global equity funds outperformed the market by between 1.2% and 1.4% on an average annual basis for the ten-year period ending in 2012.
The FT summarizes the results of a new paper to be released today.
They wrote: “Our results suggest that active management is worth considering in global equity markets.”
The research did not subtract the fees investors are charged from the performance figures, but it said pension funds and other big investors typically pay fees of around 0.75 per cent. This would leave those investors with a net gain of at least 0.45 per cent annually over 10 years.
Retail investors often pay higher fees.
David Gallagher, lead author of the study and a professor at the Australia Business School at the University of New South Wales, said the study shows active equity funds that invest globally “generate an economically significant outperformance”.
According to the study, the excess returns of global equity funds primarily came from managers’ stock selection skills, while allocations to emerging markets also helped boost performance.
Young Research’s RCs is a global dividend-based equity portfolio. Our results are simpatico with the findings reported in the FT. Over the last 10 years the RCs have delivered a compounded annual return of 6.9% (unaudited) compared to a 4.3% return for the MSCI All-Country World Index, gross (see chart below).
You can craft a domestically focused RCs portfolio from our recommendations in Intelligence Report. Access to our globally focused RCs recommendations are available exclusively through managed accounts at Richard C. Young & Co., Ltd.
Jeremy Jones, CFA
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