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Alpha: Hope Lives

We recently came across a press article posing the question of whether Active Management was dying. The article highlighted the recent robust cash flows into index funds. It then punctuated this fact by Warren Buffett’s indirect endorsement advising his own trustees to put 90% of his estate in a low cost S&P 500 index fund.

We agree that index funds have gained market share over the years, and that the pace of relative growth has quickened since the Crash. But, we think it’s a little too early to pronounce active management dead. Consider the table below.

graph

In 2003, index mutual funds accounted for 11% of all equity funds. By 2013, this figure had risen to 18%. If we add in equity ETF assets, this share rises to a healthy, but clearly not dominant, 25%. And, of course, this denominator doesn’t include hedge funds which are virtually all actively managed.

It appears to us that active management is likely to be with us for some time to come and that a substantial number of investors believe that alpha is still attainable.