Bob Doll: How to Choose the Right Active Manager

Over the past few years, there’s been a migration away from active management and toward passive management. Bob Doll, chief equity strategist at Nuveen, explained what’s been behind that in a recent video interview on Asset TV.

“Too few equity asset active managers have outperformed the benchmark,” he said. “You get that and a little pressure on fees and the financial advisors’ path of least resistance is ‘I’ll buy an index fund. I’ll buy an ETF.’”

In addition, Doll said advisors don’t know which managers are going to outperform — “and too many of them don’t,” he said — which  can also be a catalyst for choosing passive over active.

According to Doll, too many people may be adopting passive without even looking at active.

“Like everything in this business, you see the pendulum tend to go too far in one direction or the other — and I think this one has,” he said. “There are a lot of people who, it’s their knee-jerk reaction. ‘Oh, equities? I’ll go buy an index fund. I’ll go buy an ETF.’ And they don’t even consider active managers.”

That may be changing soon.

One of Doll’s predictions for 2017 is that active managers’ performance will improve as flows into equities rise. According to his predictions, active managers could outperform the broader indexes and benchmarks.

In the video, Doll explained the environment that will be needed for this shift toward active management to happen.

“There are a bunch of things that are fundamental factors that active managers tend to do better in. Like, small cap beats big cap. Like, international beats non-U.S. Equal-weighted beats cap-weighted. Value beats growth,” Doll said. “Among these factors are the tail winds that enable active managers — given their portfolio construction — to win. And we’re heading into that environment.”

In anticipation of active’s potential improved performance, Doll broke down the four factors that he believes makes for successful active equity managers:

Consistency

Doll considers “consistency of a logical process” imperative for active managers.

“There are lots of ways to manage money and to win … The ones that don’t work [are] when the manager is following whatever’s hot. Because what’s hot today is going to be cold tomorrow,” Doll said.

Active managers should have a process and make sure it works over time, according to Doll.