Peterson Research Institute (PRI) has produced a strident defence of active management by institutional investors based on an assessment of manager skill as allocated in super funds’ investment risk budgets. John Peterson says: “The active/passive debate is over – the real numbers tell the real story”.
Peterson, a former fund manager and asset consultant, formed PRI as an independent research body and has developed a “Global Investment Analysis” system which he provides free to institutional investors. The research, including the latest study on active/passive investing, can be seen at: www.prigia.com
Peterson says that the key question which has been overlooked in the debate is: “Do portfolios with more manager skill outperform or underperform those with no, or lower levels of, manager skill?” He has looked at actual portfolios from Australia’s major super funds with different levels of manager skill. Manager skill is defined as manager risk divided by total investment risk. He also observes that institutional investors “do not invest in the average manager”.
His study shows that over the 10 years to June 2013 manager skill has added value after fees, with the level of returns increasing as funds increased their allocations to active manager skill.
He also showed that the value-add has persisted during the period. The five-year periods to June 2005 and June 2010 both showed that after-fees returns of actual investment portfolios have increased as more active manager skill is included.
Peterson says: “The important questions that now need to be addressed concern the appropriate level of manager skill in a portfolio, and the associated processes of manager selection and portfolio construction.”
* Greg Bright is publisher of Investor Strategy News (Australia)