A case for active investment management

By Mary Cernilli, director, investments

Investors continue to debate the merits of active investing versus passive investing. Active investments are funds run by investment managers who try to outperform an index over time, such as the S&P 500. Actively managed investments charge higher fees to cover the extensive research and analysis required to beat index returns. Passive investments are funds intended to match, not beat, the performance of an index.

So why choose active management? The investment landscape can be classified into two different markets: efficient and inefficient markets. Traditional equity and fixed income markets tend to be highly efficient. Active management within these strategies tends to have a limited likelihood of adding value on a net of fee basis.

However, active management can add value to less efficient and alternative investment strategies. The chart below shows the return differentials of manager selection within less efficient such as International and Emerging Markets equities and alternative investment strategies such as Hedge Funds, Buyouts, and Venture Capital. The dispersion of returns demonstrates a higher likelihood of outperforming through manager selection.

We prefer active management within less efficient investment strategies, such as emerging market equities, high yield bonds, and liquid and illiquid alternatives. Thus we only allocate capital to active investment strategies when we believe we will achieve value-added performance (net of fees) and/or enhanced diversification.

The Investment Pool relies on a long-term investment strategy across asset classes, including alternative assets such as private equity, hedge funds, and absolute return strategies.

Institutional money managers are selected for specific portfolio characteristics to build a well-diversified total portfolio with a likelihood of delivering long-term returns that preserve the purchasing power of dollars invested in the Pool.

The Community Foundation’s Investment Committee closely monitors the investment of our assets.  As stewards of our assets, the Foundation’s investment committee holds the selected investment managers to the highest standards of ethical behavior and professional performance.

Learn more at cfgreateratlanta.org/investments.