Recently a number of market observers have suggested banning actively managed mutual funds from retirement plans as a way of increasing participant balances. Their logic is that actively managed funds don't beat market averages or benchmarks often enough to justify their higher fees. Also, it is said that actively managed funds tend to be recommended by advisers who profit from their sale and therefore aren't objective.
In certain situations, all of these comments may be true. However, there are good reasons for investors to embrace active management including:
- Active managers can exit falling markets quickly. Probably the most important component of active management is that there is a manager who can extract a portfolio from a falling market to avoid significant loss. Remember that the number one rule in investment management is "Don't lose my money!".
- Index performance in every market. Index investors capture 100% of every down market move. Don't like being assured of capturing all of the next equity market free-fall? Just keep in mind that your gains when the market turns will be limited by the index you have chosen. You have no chance for outperformance or portfolio adjustment to take advantage of changing market conditions.
- Markets are inefficient. Good portfolio managers exploit the inefficiencies inherit in any market. During every crash the market oversells because the world is coming to an end this time for sure. In every bull market buyers get carried away with irrational exuberance and push securities well beyond what they are worth. Taking advantage of these inefficiencies is how good portfolio managers make money for their clients.
- Not every investment adviser is conflicted. Many investment advisers are required by their employers to offer proprietary products first. There are advisers who push products, regardless of performance, which pay them and their firms the most money. You don't have to work with them. There are many independent, objective investment advisers who can help you.
- It's the American way! We like to beat the market. We aren't residents of a Soviet bloc country content to receive index performance each year. As Americans, we want to do better. It is in our competitive nature to expect above average from everything in our lives.
It makes sense to have an intelligent blend of actively and passively managed investments in every portfolio. Investors who are not taking that approach should consider talking to an adviser soon
Contributing Editor Robert C. Lawton is President of Lawton Retirement Plan Consultants, LLC a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. Mr. Lawton has over 25 years of experience working with corporations on their retirement plans and is a Chartered Retirement Plan Specialist (CRPS) and Accredited Investment Fiduciary (AIF). He may be contacted at email@example.com or 414.828.4015.
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