The Boston Company Asset Management, LLC has outlined a case for equities and active management in a recent research report. Keep in mind they are an active equity manager. Regardless, they make some good points.
The Boston Company points out a couple of compelling reasons to buy equities over the course of 2009, but my interest is in the fact that they make a case for active management rather than indexing. Many believers in active management will make similar arguments (including me to some degree).
The point is that when the current value of stocks (as measured by price to earnings ratio) is dramatically different from historical valuations, then portfolio managers that choose stocks (active management) will do better than those portfolio managers that simply track an index of stocks (passive management). So, does evidence of the above as written by The Boston Company mean that you should sell your index funds and buy actively managed mutual funds? Well, no.
Stick to the game plan you have put in place -- assuming you have a game plan. More on some suggested game plans in the near future. Until then, let us all know if you have a plan and if you are confident about your plan.
Thanks for the lead, they make some interesting points and show good data, although I would add that those higher spreads in valuation and returns can be explained by the different impact the crisis have on individual companies and sectors. Some may be considered to be more exposed than others, and return more in exchange for that higher risk.
I find the most compelling argument to be the one on page 10, about value stocks outperforming the rest one year after every market bottom in the last 80 years. To explain that, we could say that, in every one of those 10 times, things could have been worse in general, hitting those more exposed shares more than the rest, but things worked out well, which doesn’t mean they will this time.
Although that would explain it within an efficient-market-theory framework, I’m not too convinced. Irrationality may have done its part, but it might have been no more than a minor one.
To summarize, if we pay for active management now, I believe we would be (more than anything) hiring people to pick stock with higher risk and reward. Which is not necessarily a bad choice…