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February 2017

Indexing and the Evolution of Active Management

Over the past several years, index strategies have attracted an increasing portion of investors’ assets, and the trend shows no signs of slowing. In fact, index strategies have been so successful that some investors are concerned that active investing will eventually disappear, and that market efficiency will suffer as a result.

We believe that active investing will continue to play a significant role in the economy for many years. In this paper, we explore three primary reasons for our confidence in the long-term viability of active management.

  • First, flows in and out of actively managed portfolios provide an incomplete picture of the influence of active management on the efficiency of stock prices.
  • Second, many indexed portfolios are, in fact, “active” in that they offer exposure to common equity factors such as value, momentum and size.
  • Third, many investors use indexed portfolios to express tactical – i.e., “active” – views.

The lasting appeal of active investing does not mean, however, that managers of conventional active equity portfolios can relax. We believe that going forward, successful active managers will focus on innovation, portfolio implementation and/or asset allocation strategies.

While the scope of active management is evolving, many investors remain committed to active investing more broadly, and active investors who adapt to the latest trends have the potential to do well. For this reason, we are optimistic about the prospects for active management.

About the Author

Andrew W. Alford

Andrew W. Alford

Managing Director, Quantitative Investment Strategies, Goldman Sachs Asset Management

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