Picking Active Managers

To justify hiring active managers, the investor must believe 1. Some portfolio managers have the skill to deliver superior performance. 2. The investor has the talent to identify superior managers. In his paper, “Manager Selection,” Scott D. Stewart from the CFA Institute found the with respect to evidence that managers can outperform their benchmarks: “evidence suggests that it is difficult to generate positive alpha.” Furthermore, “If positive alphas persist over time, investors should be able to collect historical returns, compute alphas, and select a set of managers with the highest performance. Regrettably, although evidence suggests this approach works in the short term, the alpha appears to decay over time.” He also finds that institutional consultants “seem to follow short-term performance trends and make value-destroying decisions when hiring and firing. In terms of the performance of their investment decisions.” He points out that indexing benefits from the reduced time needed to conduct new manager due diligence and monitor current managers.