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Academics Challenge “Negative” Conventional Wisdom on Active Management

A group of academics, including Martijn Cremers known for his work on active share, recently released a paper contending that their review of current academic literature suggests that the conventional wisdom is “too negative” on the value of active management. The authors revisit and challenge widely accepted research that has shown: the average fund underperforms after fees; the performance of the best funds does not persist; some fund managers are skilled, but few have skill in excess of costs. They cite instead other research positing that, the average active fund outperforms an equivalent index fund by 36 basis points per year in terms of average performance; standard approaches to estimating average fund performance can be biased against finding that active management adds value; and that researchers do find some evidence of persistence among top-performing funds. They also cite several studies identifying groups of funds that appear to have skill in excess of costs.  For example, Cremers’ work has shown that funds with high active share tend to outperform their benchmark. Despite active management’s negative press, the academics contend that literature since 1997 “has documented that active managers have a variety of skills and tend to make value-added decisions, such that, after accounting for all costs, many actively managed funds appear to generate positive value for investors.”