COLLEGE PLANNING | ESTATE PLANNING | INSURANCE | INVESTING | PORTFOLIO SPOTLIGHT | REAL ESTATE | RETIREMENT | TAX PLANNING
The Case For Active Management
The dispiriting forecasts of lower returns mean it could be time for active managers to shine . By Jennifer Lea Reed
THE LAST DECADE HAS BEEN A GIFT TO PASSIVE INdex investors . U . S . large-cap equity enjoyed a great run beginning January 1 , 2009 , producing 14.7 % in annualized returns in the S & P 500 , an index that has come to dominate all others . And these returns have recently accelerated , rising to 24.2 % in 2023 and 23.3 % last year .
Other U . S . large-cap growth indexes have experienced similar results , with the Russell 1000 Growth index rewarding investors with 17.4 % annualized returns since the depths of the Great Recession . With this “ set-it-and-forget-it ” approach generating those kinds of yields , who needs to tax one ’ s brain with the challenges of active investing ?
But active managers don ’ t see it that way . Their job is to outperform the benchmark — so that more of a good thing , the re- turn , can become more of a good thing . Many are questioning whether big domestic growth stocks can maintain their advantage . After all , large-cap growth shares , particularly tech stocks , trounced the rest of the market in the 1990s only to lag most asset classes for the next decade .
“ There are many talented managers out there that can add alpha over time ,” says Ryan Barksdale , head of active equity products at Vanguard Group . Of the firm ’ s $ 10 trillion in assets under management , about $ 8.2 trillion is allocated to index investing and $ 1.8 trillion to active management .
“ We have advised clients who deploy both active and passive strategies in a thoughtfully constructed manner ,” he says . “ But it boils down to their ability to tolerate the risk — the risk being that of underperformance and the fact they have to pay a bit more for the objective of outperformance over time .”
There ’ s no doubt that passive investing in the U . S . has seen strong tailwinds since the global financial crisis , says David Polak , an investment director at Capital Group who leads its equities team . Capital Group , primarily an active manager , manages $ 2.7 trillion globally .
“ The typical return for equities over the long term is somewhere between 7 % and 8 %, and the U . S . has compounded at around 14 %, 14.5 %, over the last 15 years using the S & P 500 ,” he says . “ This has been extraordinary . So one of the questions passive investing faces is , ‘ How long will extraordinary continue ?’”
Not much longer , perhaps . Already there are signs that the equity market is broadening away from the dominance of the so-called “ Magnificent 7 ” mega-cap stocks , and that will give active management its chance to shine , say the style ’ s proponents .
The Broadening Of The Market
Part of the reason for the market ’ s success has been an earnings rally concentrated among those seven tech stocks ( Apple , Microsoft , Alphabet , Amazon , Nvidia , Meta and Tesla ), which saw huge consecutive quarterly gains between the second quarter of 2023 , when earnings per share grew 31 %, until the second quarter of 2024 , when they grew 37 %. In the quar-
JANUARY / FEBRUARY 2025 | FINANCIAL ADVISOR MAGAZINE | 37