What is the purpose for active management? Like most correct answers – It depends.
For the majority of our industry who all think we are above average (side note: I am an above average driver), active management is the process used to out-perform a benchmark. Most look at rate of return, some adjust for risk, and others use many more data points to come to some conclusion.
Remember, the only way to beat the benchmark is to be different than the benchmark. And the easiest way to out-perform the benchmark is to change the benchmark. For example, hedge funds were first sold as better equity solutions, then as better bond solutions, and now as diversifiers.
So if you can’t out-perform the benchmark, changing it must be ok. Then when you do out-perform the benchmark, you will be accused of not being like the benchmark (worst yet drift) and your benchmark or category will be changed. Or how about the Investment Consultant who first used balanced as the benchmark? Then, after good markets, they added cap (small, mid, and/or large), followed by international, and EM. And after bad markets, all the other things were added to the benchmark for less downside. And finally coming full circle; wanting to take away all the things added and go back to S&P/AGG. So changing the benchmark to sell a better performing benchmark is also ok.
Active management results are as expected for most managers, when they stick to their process. So as buyers, mixers, asset allocators and gatekeepers who predict which managers will do better, we need to dig deeper when combining past manager portfolio characteristics with future macro economic conditions to select the best approved manager within each category going forward.
Asking a manager to be like the benchmark and expecting a different result, net of fees, is not sane.