Time to Get Active

Summer has officially begun, and our kids are super busy.  Right after school let out, we went down to visit grandparents in Williamsburg.  We went to Busch Gardens and stayed until the park closed, then got up early the next day to be at Water Country at park opening, then saw movies and local sights.  Since we’ve been home, life has not slowed down one bit!  Between camps, field trips, special dates with their grandparents, and play dates, I am having a hard time keeping my kids’ social calendars straight!

Ben, Melanie, and Ethan on their first day out of school…

It feels like everyone gets more active in the summer—there are always places to go, friends to visit, parties to enjoy.  And this summer, we think your portfolio needs to get a little more active too.

Usually at Meridian, we shudder when we hear “active management”—for us, that is usually code for high priced, underperforming mutual funds. As studies have shown over and over, it is very challenging for active management mutual funds to outperform their benchmark index after trading costs and fund expenses are included.  Larry Swedroe, director of research for Buckingham Asset Management, wrote a great book on the reasons why it is so hard to outperform a passive index—we highly recommend The Incredible Shrinking Alpha if you’d like to know more…but basically, with markets being highly efficient, company information traveling rapidly, more market participants, and markets trading so quickly, it is more difficult to spot any outliers and capitalize on opportunities.

However, since that original research was published, there have been subsequent studies that have shown that active management—that is not excessively costly—can add value in asset classes where information is less known, markets are more illiquid and inefficient, and fewer participants exist.  A recent study by State Street Advisors showed that more than half of the actively managed funds in international, emerging, and fixed income markets outperformed their benchmarks over the 5 year period ending December 31, 2014:

Additionally, in a March report from Bank of America/Merrill Lynch, it was reported that 63% of actively managed funds are beating their benchmark indexes in 2018.  The impediments to the success of active managers like high asset correlations and low volatility were erased in the first quarter for 2018.  With the market moving rapidly around and asset class returns diverging and delinking from one another, early 2018 has created an opportunity for active managers to add value.

At Meridian, we see the growing importance of low cost, active management in the fixed income space.  With the Federal Reserve continuing to raise interest rates, the bond market is challenged.  A recent article in the Washington Post by Steven Pearlman warned of “the mother of all credit bubbles” is appearing in the bond market.  While the article is a little alarmist and loose with the facts, we do agree that rising rates will be a challenge for all borrowers who are used to historically low interest rates and very low borrowing costs!  So, for us, we feel active management in the fixed income space is very important—and we are encouraged by studies such as this one from PIMCO that shows that most actively managed bond funds outperform their benchmarks.

Sarah’s notes on the Pearlman article in the Post.  Clearly, she had too much time on her hands that morning…

So, this summer, as you and your family stay active—let us know if you’d like us to take a look at your portfolio and help it get active too!

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