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  2. INVESTING & PORTFOLIO STRATEGIES
April 29, 2014 01:00 AM

Cambridge Associates: Active investing has challenges, but can produce premiums

Christine Williamson
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    In the perennial debate over active vs. passive equity management, the challenge is more about whether or not an institutional investor can “embrace the challenges that go with investing in differentiated active managers” than whether there are active managers who can outperform market indexes over time, according to a research report from Cambridge Associates.

    The active vs. passive debate needs to shift to a review of the capability of the investment officials and investment committees of institutional investors to implement and manage a stable of active managers that “have the potential to outperform,” wrote Kevin Ely, a Cambridge Associates senior investment director, in the “Hallmarks of Successful Active Equity Managers” report.

    The challenges to creating an effective active equity management program, Mr. Ely said, include:



    • a limited supply of “optimal managers” that tend to close to new investments fairly quickly;

    • higher fees and lower liquidity are typical of active managers, but “the incremental performance” from managers with a higher percentage of active management and/or more concentrated portfolios “more than justifies the incremental fees”; and

    • more short-term volatility of individual active strategies, which “may create behavioral risk for investors who hire them” because of a tendency to “exit at the wrong time.”

    The rewards are likely to be high for institutions willing and able to handle an active equity portfolio.

    “Investing often favors those willing to take a different path than the one of least resistance. … for investors with a long time horizon and a strong discipline, we believe investing with truly differentiated active managers may help earn a premium,” Mr. Ely wrote.

    The full report, which was released Tuesday, can be downloaded from Cambridge Associates' website.

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