FundFire, citing 2013 as the year of international equities and shedding of home bias, recently reported that institutional investors are increasingly turning to active global ex-U.S. strategies (Int’l Markets Nudge Investors to Active Managers, February 26, 2013).
There are many facets to the active versus passive debate, but many investors believe active management adds alpha—particularly in the less-efficient overseas markets. At the end of 2012, $2.7 trillion of the institutional money in non-U.S. equities was actively managed, compared to just $345 billion in passive strategies.1
Investors in these active strategies have largely been rewarded. For the three years ending September 2012, just 33% of domestic large cap core managers outperformed their index, compared with 64% of global equity managers and 87% of EAFE managers.2
Advisors Take Note
401(k) plan sponsors and their advisors should take note. Virtually all plans offer at least one international or global investment option. Many of these plans are reconsidering their investment lineup in light of reaching the five-year mark on underperformance, a recent fee benchmarking exercise, or the desire to have the plan’s investment selections more broadly reflect today’s more globally interconnected markets and economies. Searches should aim to include high conviction, active global equity managers who are generally benchmark-agnostic and focus on identifying potentially successful companies, rather than allocating their portfolios based on country weights in the relevant indices.
In my view, participants relying on their 401(k) plan investments need every drop of alpha, and even a small increase in returns over many years can add meaningfully to the ability to sustain income during retirement. If 2013 is indeed the year of shedding investing home bias and a recognition of the belief that active investing adds value in overseas markets, it is the participants who will truly benefit.
- eVestment Alliance, December 2012
- eVestment Alliance, September 2012
Alpha: an investment’s return in excess of the return expected for the level of risk taken.