Morningstar conference takes hard look at active management

The keynote presentation examined why active managers are a crucial ingredient of an efficient market

With a 14-year losing streak to indexed investing, it is perhaps understandable that so many investors and financial advisers have taken to hating on active management.

But, according to Michael Mauboussin, head of consilient research at Morgan Stanley’s Counterpoint Global, active management in the public equity markets is what makes indexing so feasible and attractive to investors.

“Active managers provide liquidity and make markets efficient, and indexers, broadly speaking, benefit from this as essentially free riders,” he said Wednesday morning during the opening keynote session of Morningstar’s virtual conference.

In a presentation that plunged deep into the minutia of how and why active management is a crucial ingredient of efficient markets, Mauboussin also challenged the increasingly popular notion that the private equity markets are the home of new investment opportunities.

Despite the fact large endowments and foundations have been tilting their portfolios toward the private markets, Mauboussin said size alone makes the case for public markets over private markets for most investors.

“This year through August, five stocks saw their market caps increase by more than $2 trillion,” he said. “When you’re talking about making money there’s still vastly greater opportunities in the public markets.”

In addition to fewer opportunities in the much-smaller private markets, Mauboussin said individual investors are at a significant disadvantage when it comes to access to the best investment opportunities in the private markets.

“I’d love to see individuals participate intelligently in private markets, but access is key, and it’s hard for individuals to do that effectively,” he said.