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10 Timely Reasons for Active Equity Today*

*Per Janus' marketing department.

John Rekenthaler, 11/30/2013

A Task Destined to Fail
Janus PowerPoint landed in my email--a presentation as to why investors should buy Janus actively managed stock funds.

 Presentations about the virtues of actively managed stock funds are inevitably painful. (The lone exception is American Funds' recent defense, which dispensed with the general defense of active management and emphasized instead that which is true, the exception of American Funds' stock funds.) 

I opened the presentation, which seems to have been produced in early 2013, with the anticipation that Pride and Prejudice's Mr. Bennet feels when visited by his cousin Mr. Collins. He does not know what follies will come, but come they will, and he will delight in their variety. 

1. Exchanged-traded funds (ETFs) are growing.
A promising start! We are told that all ETFs are index funds (hmmm, this fund begs to differ), and that ETFs struggle to keep up with a "rapidly changing global business climate" because their indexing approach "continuously chases market capitalization." ETFs "look backward, not forward." 

Folly Score: High. Strong marks for recycling a 40-year-old argument in 2013. Bonus points for conflating ETFs with indexing, for implying that market-capitalization-based indexes must trade to "chase" their benchmarks, and for using the clichéd criticism that another investment manager "looks backward." Everybody looks backward; try foreseeing the future otherwise. 

2. Stock correlations are declining.
The trailing one-year correlation among the market's largest 50 stocks was relatively low by recent standards in January 2013, sharply down from year-earlier levels. This is good news for active management because "the rest of the market" is beginning to "recognize the company-specific issues the active manager has been looking at all along." 

Folly Score: Medium. I'm not certain about the thesis. The category rankings for Vanguard Total Stock Market Index VTSMX in 2011, 2012, and 2013 year-to-date are nearly identical. In each year, the index fund beat about 70% of its actively managed competitors. Per Janus' theory, that fund should have fared worse in 2012 than it did in 2011. I would need to do more research to comment further, but I am suspicious. 

Even if Janus' claim is correct, however, there's little sense in making active/passive decisions based on stock correlations, since such patterns are quite unstable. Low now might become high tomorrow. 

is vice president of research for Morningstar.

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