2 Key Times to Invest in Actively Managed Funds

Whether a fund outperforms or not is also a function of the index against which its performance is measured. Opsal found that the choice of a mainstream large-cap index can impact an active fund’s “win rate” by almost 15% on average and sometimes by more than 39%.

“Investors need to be aware of the potential for the statistics to mislead,” writes Opsal.

Actively Managed International Funds

While actively managed U.S. stock funds often underperform benchmark indexes that’s less common among international equity funds, says David Lubchenco, a partner and portfolio manager at Chautauqua Capital Management, a division of Baird.

“Investors have not generally been rewarded for indexing their international holdings,” writes David Lubchenco, who helps manage the firm’s International Growth and Global Growth funds.

Lubchenco says 74% of foreign large blend funds outperformed the All Country World Index excluding the U.S. (ACWX), and 65% did so over three years. (The ACWX index dates back to 2009, so 10-year data is not available).

Actively managed international equity funds have a greater chance of outperforming if correlation among stock performance is low and the dispersion of returns is high, which indicates that not all stocks are rising in lockstep with each other, says Lubchenco.

He explains that actively managed international and global funds have better odds of outperforming U.S. actively managed funds currently because monetary policies overseas are now more accommodative than central bank policy in the U.S., 95% of the world’s population resides outside the U.S., and 75% of the world’s economic activity occurs in emerging and developing countries outside the U.S.

“Given elevated growth rates in these non-U.S. countries, active managers simply have more opportunity to find strong, high-quality growth investments,” writes Lubchenco. “Successful active management should matter more today than at any other time.”

But the stock picking prowess of portfolio managers is key.

The Chautauqua International Growth Fund (CCWSX) and Chautauqua Global Growth Fund (CCGSX) are both concentrated funds with 30 and 40 stocks, respectively, representing the managers’ best ideas for the long term to reduce volatility and generate returns. The goal is to provide 300 basis points (3%) of outperformance over a cycle of three to five years.

The portfolios are diversified by sector and “populated with companies whose products are so highly valued or mission-critical to customers that they’re resilient to economic forces that would be disruptive to most companies,” according to the funds’ Q2 commentary. The impact of currencies and the geographic sources of revenues rather than the location of headquarters are also key considerations, says Lubchenco.

No Either/Or

Advisors don’t have to choose between active and passive funds. “Don’t lock in to all passive or active,” says Opsal. “They’ll each have their own chance to shine.” His advice: “Find your favorite active funds, your favorite passive funds, and built your portfolio with both.”