Foundation & Endowment Report's August Issue featured NEPC's Kristin Reynold's story "Active Management Isn't Dead."
Active management vs. passive management has been discussed ad nauseam, both within the endowment and foundation community and in the media. But despite the widespread headlines proclaiming that active management is dead, our conversations with endowments and foundations tell another story: the market has reached a point of equilibrium and large institutional investors still place significant value on skilled active management. According to a survey we conducted in May, just 7% of endowments and foundations plan to substantially increase their use of passive management within the next year. The majority – 51% – plan to maintain their current exposure.
For many investors, active management historically offered an asymmetric risk/reward profile, where the expectation was that active managers would protect during market downturns and keep pace, for the most part, in positive trending environments. Ultimately, this would lead to active management outperforming over a full market cycle. The current bull market for U.S. stocks (which has now lasted more than eight years) is the second-longest in history and has been driven by global liquidity, but dotted with continued worries of economic downturn. Despite some interim volatility, U.S. stocks continued to rise, and this has proven to be a struggle for many active managers. A market downturn will surely happen at some point, and that’s when investors historically have wanted protection in the form of active management and other strategies offering performance that can deviate from that of “the market.”