Review: Return Of The Active Manager

In Return Of the Active Manager, C. Thomas Howard and Jason Apollo Voss make the case that active management may actually be on the verge of a major comeback.

As recently as 2009, active mutual funds enjoyed a market share of over 75%, with passive index funds making up less than 25%. In 2018, active and passive funds reached parity, with each taking about 50%. It’s safe to assume that, once the numbers are tallied, passive funds will overtake active funds in 2019. Howard and Voss eventually expect the split to stabilize at roughly 70% passive index funds and 30% actively managed funds.

It’s not hard to understand why. As Howard and Voss explain it, the fund industry is structured to force active managers into being closet indexers, which is a battle they can’t win. They can’t beat the index if, in the authors’ words, “active managers are being asked, not just to beat the index, but to do so with the same securities, the same industry weightings, no tracking error, no style drift, the same volatility, with lower expenses,” etc.

The authors make a compelling case that Morningstar and its style boxes are to blame. While Morningstar intended for their style boxes to describe and evaluate funds after the fact, instead they became a straitjacket of investment constraints before the fact.