Matthew Hoggarth, an investment professional that we like a lot, recently wrote this article for Wealth Manager magazine. 

In it we think he tries to highlight where active managers could/should be looking for value in today’s overblown markets. He settles eventually on value stocks and smaller companies, concluding that most other options are overvalued. 

The slightly unfortunate effect of the article though is to again highlight how active managers are struggling to add value to justify their fees. He highlights the fact that there are few places to invest at a decent price, points out that in these small corners active managers have not been outperforming and then advocates passive. 

The argument for active management has always run that they add value by getting the asset allocation right and picking winners in the smaller sectors that are less well researched like smaller companies. The problem with this argument is that it starts to breakdown if the likes of Hoggarth are saying that active managers can’t pick stocks even in the small companies sector. 

If this is true all you are left with from an active manager is asset allocation. 

There is plenty of research that suggests that asset allocation drives the majority of returns so maybe that is worth paying an investment manager for but the large passive investment fund companies can do this for you as well. So the question, being reductive, is how much is it worth paying for dynamic asset allocation. We at Altor have not worked out the numbers but if we can find an academic to do it we will. In normal markets we would guess that it might be 0.3% (Hoggarth’s own firm have a service priced at this level) but it is certainly not the 1%-2% some firms are charging. 

In a market crash, however, the right asset allocation could save you from losing a large percentage of your wealth. Increasingly it looks as though the only hope for active managers is a really hard stock market crash. 

An odd thing for a fund management to be praying for.