The Essex Exchange – Q2 2015: Active Management Poised for a Comeback in a “Stock-Pickers” Market


Active Management Poised for a Comeback in a “Stock-Pickers” Market 

As the chart below shows, there has been a huge influx of cash flows into passively managed vehicles and away from actively managed funds.


And the media has not let the public forget that in general, passively managed funds have outperformed the actively managed ones at a lower fee. To quote The Boston Globe, “Stock pickers were badly outperformed by indexers last year, with their average return falling well short of the S&P 500 return of 13.7 percent. Active managers have consistently trailed the index over the past decade, and last year was worse than most others.” It goes on to say “Active stock managers need to earn their fund management fees — typically about 1 percent versus 0.17 percent for Vanguard’s S&P 500 fund — before they can even think about outrunning the market’s benchmark. Over the long term, most can’t do it and the average investor has a very hard time identifying the minority who will beat the market in the future.”

Despite the media’s generalizations, not all active managers are created equal. We believe that Essex is one of the small group of active managers that not only has provided good absolute returns, but has also shown, in many instances, to successfully exceed our benchmarks over both the short and long-term. As history tells us, correlations and stock dispersions will tend to normalize and extended charts eventually will show a return to the mean. For the most part, we have been basically fully invested and optimistic since 2009 after the drop in the market in 2008. We have had a great run due to a rising market but more particularly due to good sector and stock selection. While there has not been a euphoric feeling behind this market rise…


…we want you to understand we are fully cognizant of the risks involved in this uncertain world in which we live and we aim to position our portfolios accordingly. With this in mind you may see us become somewhat more defensive in the future. The true benefits of active management come into play during times of heightened market volatility, market drawdowns, and a loosening of tight correlations. Active managers stand to be rewarded during “stock-pickers” markets in which there is pronounced differentiation between the clear winners and the clear losers. In addition, active management can deploy cash as a defense in a market downdraft unlike an unmanaged passive approach. A defensive posture would only be to protect assets while waiting for a more opportune time to become more aggressive again; because over the long-term we continue to believe that equities are the best alternative to protect and grow one’s assets.


Steve Cutler is a member of the Essex Investment Committee and manages All-Cap Growth portfolios as well as balanced portfolios for individuals and institutional clients. For more information please call 617-342-3200 or email