“Have you sold out?” That was the half-joking response of a friend when I told him I was consulting with L2 Asset Management, an active fund manager.
I have been (and remain) a passionate advocate for index-based investing for over two decades. I wrote The Smartest Investment Book You’ll Ever Read in 2006. In that book (and in five subsequent ones and hundreds of articles), I distilled sound investing to three index funds from low-cost providers like Vanguard.
Q1 2022 hedge fund letters, conferences and more
For many investors, market-cap weighted index funds deliver inexpensive beta and are a valuable resource.
Why then would I work to increase the profile of an active fund manager? My reasons reflect the increasing pressure on advisors to differentiate themselves and demonstrate value. They also illustrate the blurred line between “active” and “passive” fund managers.
What is active?
The line between active and passive management is no longer binary. According to this thoughtful article from Dimensional Funds, “Evolution of the investment landscape has rendered binary active/passive labels outdated for comprehensively describing an investment strategy’s approach.”
Funds that engage in stock picking and market timing are clearly active.
Funds that track a broad-based, highly diversified index are clearly passive.
What about well-known fund managers like Dimensional, AQR and Blackrock? These fund families offer funds that screen for factors, identify market segments with higher expected returns, consider market liquidity, avoid stocks with certain characteristics or engage in flexible trading to reduce costs, using processes that are informed by credible evidence in peer-reviewed journals?
Their process is systematic and replicable. They implement it without judgment.
Can they be categorized as either “active” or “passive”?
How to categorize L2
L2 is highly disciplined and invests for the long term. It applies a consistent investment philosophy that combines behavioral finance with rigorous fundamental insight. It defines its “hallmark traits” as “discipline, high levels of active share, low turnover and tax efficiency.”
L2’s team integrates quantitative and fundamental processes to avoid behavioral errors and optimize their investment process, honed over 12 years of working together.
Its offerings include separately managed accounts, ESG mutual funds and two private funds: an Equity Market Neutral Fund and a Long Short Equity Hedge Fund. It is a sub-advisor to the Knights of Columbus for its Long/Short Equity Fund and its All-Cap Index Fund.
L2 doesn’t engage in stock picking or market timing. Its approach to investing is rules-based, replicable and implemented without judgment. Consequently, like the fund families I previously described, it doesn’t fit neatly in the “active” or “passive” category.
Read the full article here by Dan Solin, Advisor Perspectives.
