Finding Alpha with Active Managers
Many investors are convinced that alpha has disappeared from U.S. equity markets and prefer to use passive investment tools such as exchange traded funds (ETFs) to broadly gain exposure to these markets. The problem with this approach is that it gives up any chance of outperformance and forces an investor to settle for benchmark returns minus fees. It also ignores the fact that alpha potential does exist. Although many active managers have not done a good job in capturing alpha, there are many who have outperformed over time, producing very sizeable excess returns.
Do Not Give Up on Stocks: Stay Active
Stocks clearly have much better fundamental earnings support now than they did in mid-2009, when profits were still in a downward spiral. Money, however, is flooding away from active strategies and into passive indexing and ETFs. At this juncture, the headwinds against expansion are considerable and this stacks the balance of risk in favor of active stock-picking strategies that maintain a strong valuation bias. Higher-quality large cap stocks should also be emphasized, since the rally off the bottom has favored lower quality names, leaving the larger names with more attractive upside.