Chapter 7 The Case for Active Management

In striving for returns that beat the market averages, investment managers face many challenges—ranging from adverse economic and market climates, to a competitive battle among active managers, to a flood of low-cost passive investment products that match the returns of the market. Asset owners face their own set of demands, in having to identify managers able to carry forward their skill into future markets. This chapter starts with a front-row seat in the active-passive debate, and then details our reasoning on the merits of investing with active managers, and thoughts on manager selection.

April 2015: Investment Giants Square Off in New York City

Promoters of the active-passive struggle sponsored a championship bout in April 2015, at New York’s Plaza Hotel. Two of today’s more thoughtful financial minds—Jack Bogle, founder of the mutual fund giant Vanguard Group, and innovator of the S&P 500 index mutual fund, and Jim Grant, renowned financial author and editor of Grant’s Interest Rate Observer—mounted the Plaza podium.1 The occasion was one of the popular conferences on professional investment sponsored by Grant’s, and the aim was to further the decades-long discussion central to the investment management business. An excerpt of their comments:

Jack Bogle: “The low-cost proposition is elemental and simple: the gross market returns shared by investors, as a group, is a zero-sum game. The cost of investing, shared by active [mutual ...

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