Active v Passive
Hi Raul,
I'd look at this as follows.
Irish Life's Consensus Fund (the dominant one in the market) has given the following returns over 1, 3 and 5 years, according to Mercer's survey: -17.3%, -2.5% pa, and +4.9% pa. The median active fund returns for the same periods have been -17.3%, -2.3%pa, and +4.0% pa respectively. That's a satisfactory performance for the manager, and a satisfactory outcome for the clients who've chosen this strategy. The 5-year excess return over the median is perhaps a little higher than may be achieved long-term, and the 1- and 3- a little lower, but we'll see. As I said in a previous post, the fund has done its job in good markets and bad. As Rainyday pointed out, it is a low cost option in many (but not all) circumstances.
Over 1 year, the best performer is BIAM (-9.8%), the worst is KBC (-22.7%). There is a category of investor, potentially very large, for whom that range of return is an unacceptable risk to take, and who would prefer the "certainty" of the predictable (relative) return that consensus gives. In that way, it's analogous to index versus active management in a sector, such as US or UK equities. It seems to me, as I've posted elsewhere, that statistically, the odds in favour of indexation are pretty compelling, and that if you do choose active management, you should do so carefully and in the knowledge that you're taking an additional level of risk which may or may not be worth it - ie indexation is the benchmark against which you should judge your active management strategy.
You're right on the style issue. Managers will rise and fall in the tables due to their investment style (that's what has caused at least some of the cyclicality to which Brendan referred), but if it can't be predicted, then that fact has no value to investors other than as a post-facto explanation of events.
As for the lags, which have also come up in other threads, I wouldn't overestimate them. Ask Irish Life what rebalancing they have to do within their consensus fund, and they'll tell you that the aggregate asset mix tends to move slowly and steadily. And also, don't forget there's no evidence that active managers are better at asset allocation than at stock selection, so that lagging their asset decisions may not hurt your performance at all.