Michael Kitces: Measuring the Value of Active Management

How do we determine the “value” of active management?

It’s a question we ask ourselves in the industry and a question all investors who work with professionals struggle with as well from time to time.

There are extremists at the opposite end of the spectrum who will view it as a given that either “buy-n-hold is dead” or the indexes will always win over time. I’m not sure it’s all that simple.

I don’t purport to have an up-or-down, black-or-white answer for you – too many variables – but I think my friend Michael Kitces at least gets down to what the right questions are:

Determining whether an active manager is having a positive impact is a difficult thing to measure, without a doubt. Yet before one can even begin to determine if a manager is delivering value, you must first consider what it takes to constitute “value” in the first place. How much does an active manager need to outperform, in order to be delivering value to the client, to be worth the fee that is paid to the manager? Yet for some reason, we scale we use to measure the cost is very different than how we measure (out)performance. Is there a double-standard here?

Keep Reading:

Is There A Double-Standard For Measuring the Effectiveness of Active Management? (Nerd’s Eye View)