New research from Verus shows that risk and return from active management are often not related in the way that one might expect. Investment managers within each asset class behave in different ways, and investors and consultants should take these differences into account when considering whether or not to pursue active management.
Every year Verus researches the environment for active management. This year our report uses newly developed analytical tools which provide significantly more detailed information about the behavior of manager universes, and allows for an in-depth look into the following key features of the active management marketplace:
- Active managers within each asset class are characterized by a wide range of risk and return results, many of which are very different from the benchmark and median manager. This means that using the benchmark and median manager as proxies for the universe may be an overly-simplistic and inappropriate approach.
- Investors would typically expect increased risk to be compensated by increased return. In reality there is good evidence that in many asset classes increased risk is not compensated by greater return – while reduced risk may be achievable without sacrificing return
- These risk/return anomalies provide ample opportunity for active managers to provide value in investors’ portfolios, as long as the decision to use active management is made in a considered, evidence-based fashion.
- Investor needs and goals should always be the starting point for deciding whether to use active or passive management approaches. The deeper insight contained in this new report provides tools for consultants and investors to ensure closer alignment between investor goals and active management opportunities.