What Do Active Managers Do (That Index Funds Don’t)?

Sheaff Brock | active investment management vs passive investing through index funds

What Do Active Managers Do (That Index Funds Don’t)?

There are many people espousing the use of index funds, ETFs or other passive products, instead of using a firm like ours that provides active management of individual stocks (or like our sister company, Salzinger Sheaff Brock, that uses active management with a portfolio of ETFs and mutual funds), Sheaff Brock Managing Director Dave Gilreath reflected in an interview with our SheaffBriefs editor …

It’s an old, old debate about which way to manage investments is better—you know, the active v. passive argument. Investors gravitate towards index funds because of the low expense ratios, rationalizing their choice by saying active mutual fund managers haven’t been able to beat index benchmarks.

It’s no secret on which side of the passive/active fence you’ll find Dave Gilreath, Chief Investment Officer at Sheaff Brock. Successful long-term investing, Gilreath says, is about preserving capital during downdrafts and keeping emotions in check. During a bull market, an index product is fine, easy, and cheap. “But who is watching the store when there is a riot in the streets? Only you are left doing that,” Gilreath warns. “It just seems there is an excited crowd at the index fund storefront window admiring average-looking goods.”

Asked “So what, exactly is it that active managers DO (that index fund managers don’t) in order to give investors a better chance at better-than-average ‘goods’”? Gilreath has plenty of answers. Active managers:

  • constantly analyze portfolios, trying to add money to cheaper stocks
  • hold back investing if the market is really pricey
  • never automatically direct investors’ money into the biggest companies (normally those stocks that have already gone up the most)
  • strive to buy low and sell high
  • adjust to actual circumstances

Some specific quotes from the Sheaff Brock July 2017 Market Update demonstrate just how detailed an active management focus can be:

  • “We are continuing to add index put spreads on the SPDR S&P 500 ETF (SPY) in all accounts with notional exposure wiggle room.”
  • “Before other repeal-and-replace swaps are made, we need to wait for some of the first swaps to expire.”
  • “Currently we have a position in all but one S&P sector; no telecom stocks made the grade.”

Many pundits are saying active management is “deadsville,” Gilreath remarks with a we’ve-heard-that-one before smile. They’re the ones claiming passive investing through index funds is the most efficient way to go. “Really?” Gilreath asks.

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