Evaluating Opportunities in Active Management

Abstract

Institutional investors are frequently faced with making a choice between active and passive management. The ability to select skilled managers who can add value beyond a comparable passive benchmark may justify the case for active implementation. One fundamental approach toward evaluating active managers is segregating them based on the region of their investment focus—US large-caps, international large-caps, global small-caps, and emerging markets—and then reviewing the active management opportunity and the past success of active managers in each of these market segments. Our study reveals that both emerging markets and small-caps were relatively less efficient, provided a diverse universe for stock selection, and exhibited higher return dispersion than other market segments, thereby creating a dynamic pool of potential opportunities for active management. In addition, active managers have been more successful in selecting emerging market and small-cap stocks and have exhibited higher persistence in performance in these markets. <b>TOPICS:</b>Manager selection, equity portfolio management, emerging markets <b>Key Findings</b> • The ability to select skilled managers in opportune markets, those who can add value beyond a passive investment tracking an index, may justify the case for active implementation. • Global small-caps and emerging markets offered greater opportunity for active stock selection compared to the US and international large-cap equity segments. • Global small-cap and emerging markets active managers were more successful in adding value over their benchmarks compared to US large-cap active managers, even when results were neutralized for systematic risk factors. Additionally, small-cap and emerging markets managers exhibited higher persistence in performance.