Alpha found: Comparing active multi-asset managers with a passive model


The financial industry debate comparing performance of active and passive management should go beyond a focus on U.S. equity portfolios and also include multi-asset managers.

Our analysis of performance of funds in several multi-asset allocation categories over five-year rolling periods from 1986 through 2016 suggests that multi-asset managers have historically produced positive alpha.

The mean alpha was over 1% net of fees on an annualized basis, translating into "spendable alpha" for investors that can compound over time.

The debate over an active portfolio manager's ability to produce positive alpha often leaves people impassioned on both sides. Critics of active management point to recent history and argue that the average active manager has failed to outperform a stated benchmark net of fees. Proponents of active management acknowledge the recent challenges but emphasize that central bank policies, unique in history and in effect for nearly a decade since the 2008 financial crisis, may have blunted the ability of traditional active managers to produce alpha. When the policies are removed, managers should generate alpha again.

Much of this debate has focused on U.S. equity managers, which is understandable given the size and importance of the asset class. However, the fundamental question of the debate — whether active managers add value — should lead to attention on multi-asset managers, who, in theory, have more tools to add value not only through security selection, but through asset allocation decisions as well.

Alpha is alpha, and investors should be willing to pursue it from any asset class or strategy. If it is demonstrated that active multi-asset managers can generate alpha, the next question for financial advisors should be how to use multi-asset strategies in a portfolio.

Evaluating active management

The value proposition for active management is that a manager can choose securities from a defined investment universe and build a portfolio that can outperform general market indexes plus the cost of management and trading. Testing this proposition requires defining the parameters of the performance comparison and methodology, which can take different forms and yield different results. One way to compare performance is to rank the portfolio's peer universe. A second way is to compare the actively managed portfolio with the manager's stated benchmark. But how does one judge a fund that is toward the top of its peer universe, but has lagged its stated benchmark, and vice versa? Additionally, looking at performance solely versus peers or the stated benchmark does not always allow for direct or transparent comparisons, as there could be other factors at play in driving a fund's return. For example, a portfolio may have less overall exposure to the market or have sector weightings that may contribute to the performance differences.

A third way to measure performance that helps to eliminate some of these questions is to apply a risk factor model, which reveals the key drivers of return over a specific period and provides a much more accurate accounting of the value added by the active manager. A risk factor method offers the best potential to illuminate the historical ability of multi-asset managers to produce positive alpha for investors over time.


Christian J. Galipeau

Senior Investment Director

Christian Galipeau
Brendan T. Murray

Senior Investment Director

Brendan Murray
Seamus S. Young, CFA®

Investment Director

Seamus Young

Find out more about Putnam's active approach to multi-asset investing and the performance achieved by our long-tenured Global Asset Allocation team.

Important disclosures: The Bloomberg Barclays Intermediate U.S. Aggregate Bond Index is an unmanaged index of U.S. investment-grade fixed-income securities with remaining maturities of one to ten years.

The MSCI EAFE Value Index is an unmanaged index that measures the performance of equity securities representing the value style in countries within Europe, Australasia, and the Far East.

The Bloomberg Barclays U.S. Corporate High Yield Bond Index is an unmanaged index that measures the USO-denomi­nated, high-yield, fixed-rate corporate bond market.

Russell 1000 Index is an unmanaged index of the 1,000 largest companies in the Russell 3000 Index. Russell 2000 Index is an unmanaged index of the 2,000 small companies in the Russell 3000 Index.

S&P GSCI Index is a composite index of commodity sector returns that represents a broadly diversified, unleveraged, long-only position in commodity futures. You cannot invest directly in an index.

The views and opinions expressed are those of the authors and Putnam Investments, are subject to change with market conditions, and are not meant as investment advice.

For investment professional use only. Not for use with the public.