Hope Springs Eternal For Active Management....And is Once Again Disappointed

It seems that investors, be they individuals or institutions are constantly swayed by the promise of active managers that they will consistently outpeform their relevant indices and yet are they are constantly disappointed. It seems this well documented pattern in the US has its counterpart in Europe. From the WSJ (my bolds)

JUNE 3, 2009.In Europe, Are 'Active' Managers Worth It? .ArticleCommentsmore in Europe
By MARK COBLEY

As they ruefully watch their poor performance, pension funds in Europe are questioning whether some stock and bond pickers are worth their fees.
Since the start of 2008, Norway's government pension fund, one of the world's biggest with €232 billion ($328.47 billion) in assets, has dropped 16 of the 22 firms that managed its fixed-income investing, according to its Web site. Most of these have active-management strategies, many with exposure to securitized U.S. debt, which suffered heavy losses last year. Norway's Ministry of Finance is undertaking a review of whether active management is cost-effective.

Italian bank UniCredit SpA in March moved some of its €1.8 billion pension fund's holdings from active to passive strategies. The €2.5 billion Dutch pension for the hotel and catering industry in December shifted €400 million from an actively managed mandate to index-tracking. The Swedish government has asked the country's four big state pension funds to reconsider their use of active fund management, following big investment losses last year.
"We have learned lessons in risk management over recent months. We realized our measurement of risk in fixed income has not been sufficiently robust," said Thomas Ekeli, an investment director in Norway's Ministry of Finance, at a conference in London in March.

The ministry owns the pension fund, which is huge as a result of tax receipts from Norway's extensive oil reserves.

The virtues of active versus passive management is one of the evergreen debates of investing. Active managers pick stocks, bonds or other investments for a fee and maintain they can deliver outsize returns often with the same or less risk of a broader index. Fans of passive management -- designed to mirror an index and keep fees low -- insist that over time it is a rare manager who can beat the market, and that the cost savings of index tracking can't be beat.

Huge amounts are at stake. Institutional money managers can make far more selling their skills as active managers than selling products that track an index.

But down markets are when their clients often count on active managers most to minimize losses, and -- amid the financial crisis -- many didn't deliver. The Norway fund's 2008 annual report said it underperformed its benchmark in equities by what it deemed an "acceptable" 1.2 percentage points, but in fixed income it undershot by 6.6 percentage points. The fund lost 23.3% of its value last year.

Public pension experts say they aren't seeing similar trends in the U.S. Keith Brainard, research director at the National Association of State Retirement Administrators, says active and passive investing styles at public pensions are typically in a "state of flux. It's not unusual on any given day to hear that one fund is moving toward active investing from passive and the other way around."

California's giant pension, the California Public Employees' Retirement System, has historically relied on passive investing in its publicly traded equity portfolio, whereas fixed income is actively managed. Calpers has found that, for equities, passive investment is preferable because the market has been fairly efficient.

Based on this last part of the article it seems that in the US just as hope for active managers springs among one institutional investor, another throws in the towel and goes passive.