Image alt tag

Error!

X

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

X

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

X

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

A verification Email Has Been Sent

Close

An email verification email has been sent to .
Follow the instructions to complete the email validation process.

I have not received my verification email

Check your SPAM mailbox and make sure that twelcome@lordabbett.com is allowed to send you mail.

I'm still having trouble

If you're still having trouble verifying your email address. feel free to contact us.

1-888-522-2388
clientservices@lordabbett.com


OK

We're sorry. We found no record of the email address you provided.

Close

Register For a LordAbbett.com Account
Using Your Email Address.

  • Registered Financial Advisors gain access to:
  • Our data mining tool, Insight & Intelligence
  • Best in-class practice management content
  • Educational events, videos and podcasts.
  • The Lord Abbett Review - Subscribe now!

Registered but Having Problems?

If you believe you are registered and are having problems verifying your email address, feel free to contact us.

1-888-522-2388 clientservices@lordabbett.com

Terms & Condition

X

These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

2. Your Privileges. · Personal Use. Your use of the Intelligence System is a nontransferable privilege granted by us to you and that we may deny, suspend or revoke at any time, with or without cause or notice. · Access to and Use of the Intelligence System. The User ID and password (together, an "Access ID") issued by us to you (as subsequently changed by you from time to time) is for your exclusive access to and use of the Intelligence System. You will: (a) be responsible for the security and use of your Access ID, (b) not disclose your Access ID to anyone and (c) not permit anyone to use your Access ID. Any access or use of the Intelligence System through the use of your Access ID will be deemed to be your actions, for which you will be responsible. · Required Technology. You must provide, at your own cost and expense, the equipment and services necessary to access and use the Intelligence System. At any time, we may change the supporting technology and services necessary to use the Intelligence System. · Availability. We make no guarantee that you will be able to access the Intelligence System at any given time or that your access will be uninterrupted, error-free or free from unauthorized security breaches.

3. Rights in Data. Our use of information collected from you will be in accordance with our Privacy Policy posted on the LAIS Site. Our compliance with our Privacy Policy will survive any termination of these Terms of Use or of your use of the Intelligence System.

4. Your Conduct in the Use of the Intelligence System. You may access, search, view and store a personal copy of the information contained on the LAIS Site for your use as a broker/dealer. Any other use by you of the Intelligence System and the information contained on the LAIS Site these Terms of Use is strictly prohibited. Without limiting the preceding sentence, you will not: · Engage in or permit any reproduction, copying, translation, modification, adaptation, creation of derivative works from, distribution, transmission, transfer, republication, compilation or decompilation, reverse engineering, display, removal or deletion of the Intelligence System, any portion thereof, or any data, content or information provided by us or any of our third-party sources in any form, media or technology now existing or hereafter developed, that is not specifically authorized under these Terms of Use.

· Remove, obscure or alter any notice, disclaimer or other disclosure affixed to or contained within the Intelligence System, including any copyright notice, trademark and other proprietary rights notices and any legal notices regarding the data, content or information provided through the Intelligence System.

· Create a hyperlink to, frame or use framing techniques to enclose any information found anywhere on the LAIS Site without our express prior written consent.

· Impersonate any person, or falsely state or otherwise misrepresent his or her affiliation with any person in connection with any use of the Intelligence System.

· Breach or attempt to breach the security of the Intelligence System or any network, servers, data, or computers or other hardware relating to or used in connection with the Intelligence System; nor (b) use or distribute through the Intelligence System software or other tools or devices designed to interfere with or compromise the privacy, security or use of the Intelligence System by others or the operations or assets of any person.

· Violate any applicable law, including, without limitation, any state federal securities laws. 5. Your Representations and Warranties. You hereby represent and warrant to us, for our benefit, as of the time of these Terms of Use and for so long as you continue to use the Intelligence System, that (a) you are, and will continue to be, in compliance with these Terms of Use and any applicable laws and (b) you are authorized to provide to us the information we collect, as described in our Privacy Policy.

6. Disclaimer of Warranties.

· General Disclaimers.

THE INTELLIGENCE SYSTEM, THE LAIS SITE AND ALL DATA, INFORMATION AND CONTENT ON THE LAIS SITE ARE PROVIDED "AS IS" AND “AS AVAILABLE” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND. WITHOUT LIMITING THE PRECEDING SENTENCE, LORD ABBETT, ITS AFFILIATES, AGENTS, THIRD-PARTY SUPPLIERS AND LICENSORS, AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, DIRECTORS, OFFICERS AND SHAREHOLDERS (COLLECTIVELY, THE “LORD ABBETT GROUP”) EXPRESSLY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NONINFRINGEMENT. YOU EXPRESSLY AGREE THAT YOUR USE OF THE LAIS SITE, THE INTELLIGENCE SYSTEM, AND THE DATA, INFORMATION AND CONTENT PRESENTED THERE ARE AT YOUR SOLE RISK AND THAT THE LORD ABBETT GROUP WILL NOT BE RESPONSIBLE FOR ANY (A) ERRORS OR INACCURACIES IN THE DATA, CONTENT AND INFORMATION ON THE LAIS SITE AND THE INTELLIGENCE SYSTEM OR (B) ANY TERMINATION, SUSPENSION, INTERRUPTION OF SERVICES, OR DELAYS IN THE OPERATION OF THE LAIS SITE OR THE INTELLIGENCE SYSTEM.

· Disclaimer Regarding Investment Research.

THE INTELLIGENCE SYSTEM INCORPORATES DATA, CONTENT AND INFORMATION FROM VARIOUS SOURCES THAT WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, THE LORD ABBETT GROUP MAKES NO CLAIMS, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY, TIMELINESS, COMPLETENESS OR TRUTHFULNESS OF SUCH DATA, CONTENT AND INFORMATION. YOU EXPRESSLY AGREE THAT YOU ARE RESPONSIBLE FOR INDEPENDENTLY VERIFYING YOUR INVESTMENT RESEARCH PRIOR TO FORMING YOUR INVESTMENT DECISIONS OR RENDERING INVESTMENT ADVICE. THE LORD ABBETT GROUP WILL NOT BE LIABLE FOR ANY INVESTMENT DECISION MADE BY YOU OR ANY OTHER PERSON BASED UPON THE DATA, CONTENT AND INFORMATION PROVIDED THROUGH THE INTELLIGENCE SYSTEM OR ON THE LAIS SITE.

· Survival.

THIS SECTION 6 SHALL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM..

7. Limitations on Liability.

NONE OF THE MEMBERS OF THE LORD ABBETT GROUP WILL BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES (INCLUDING LOSS OF PROFITS, LOSS OF USE, TRANSACTION LOSSES, OPPORTUNITY COSTS, LOSS OF DATA, OR INTERRUPTION OF BUSINESS) RESULTING FROM, ARISING OUT OF OR IN ANY WAY RELATING TO THE INTELLIGENCE SYSTEM, THE LAIS SITE OR YOUR USE THEREOF, EVEN IF THE LORD ABBETT GROUP HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION 7 WILL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM.

8. Miscellaneous Provisions.

· Governing Law. This Agreement will governed by and construed in accordance with the laws of the State of New York, without giving effect to applicable conflicts of law principles.

THE UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT OR ANY VERSION THEREOF, ADOPTED BY ANY STATE, IN ANY FORM ("UCITA") WILL NOT APPLY TO THESE TERMS OF USE. TO THE EXTENT THAT UCITA IS APPLICABLE, THE PARTIES HEREBY AGREE TO OPT OUT OF THE APPLICABILITY OF UCITA PURSUANT TO THE OPT-OUT PROVISION(S) CONTAINED THEREIN.

The Intelligence System is not intended to be used by consumers, nor are the consumer protection laws of any jurisdiction intended to apply to the Intelligence System. You agree to initiate and maintain any action, suit or proceeding relating to these Terms of Use or arising out of the use of the Intelligence System exclusively in the courts, state and federal, located in or having jurisdiction over New York County, New York.

YOU HEREBY CONSENT TO THE PERSONAL JURISDICTION AND VENUE OF THE COURTS, STATE AND FEDERAL, LOCATED IN OR HAVING JURISDICTION OVER NEW YORK COUNTY, NEW YORK. YOU AGREE THAT YOU WILL NOT OBJECT TO A PROCEEDING BROUGHT IN YOUR LOCAL JURISDICTION TO ENFORCE AN ORDER OR JUDGMENT OBTAINED IN NEW YORK.

· Relationship of Parties. The parties to these Terms of Use are independent contractors and nothing in these Terms of Use will be construed as creating an employment relationship, joint venture, partnership, agency or fiduciary relationship between the parties.

· Notice. All notices provided under these Terms of Use will be in writing and will be deemed effective: (a) when delivered personally, (b) when received by electronic delivery, (c) one business day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt, or (d) three business days after having been sent by registered or certified mail, return receipt requested. We will only accept notices from you in English and by conventional mail addressed to: General Counsel Lord, Abbett & Co. 90 Hudson Street Jersey City, N.J. 07302-3973 We may give you notice by conventional mail or electronic mail addressed to the last mail or electronic mail address transmitted by you to us.

· Third-Party Beneficiaries. The members of the Lord Abbett Group are third-party beneficiaries of the rights and benefits provided to us under these Terms of Use. You understand and agree that any right or benefit available to us or any member of the Lord Abbett Group hereunder will also be deemed to accrue to the benefit of, and may be exercised directly by, any member of the Lord Abbett Group to the extent applicable.

· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Equity Perspectives

The stock market will never be perfectly efficient, so active managers—especially diversified stock pickers—will often have opportunities to outperform.

 

In Brief

  • Active management performs a critical role in a capitalist economy: capital allocation. Without active management, capital would not be directed to those who will use it most productively.
  • Passive investing is not really passive; it requires investors to make asset allocation decisions, which, in turn, requires weighing forecasted performance of asset classes in light of investment goals.
  • Passive investing grew out of the Efficient Markets Hypothesis (EMH), the belief that markets are efficient. But markets are not perfectly efficient.
  • If they were, market prices would reflect all relevant information, and there would be no incentive for investor to go to the effort of gathering information and trading on it. But if they didn’t gather information and trade on it, prices would not reflect all relevant information.  
  • So, there will often be potential opportunities for active managers to outperform, and research on Active Share shows that a particular type of active management—diversified stock picking—historically has been more likely than others to do so.

 

There’s no question that passive management has made substantial gains in the market for asset management services. According to the Investment Company Institute (ICI) 2014 Fact Book, between 2003 and 2013, net assets in equity index funds rose from 11.4% of equity mutual fund assets to 18.4%. This has led a few commentators to question the role of passive management’s opposite number: active management. But they appear too eager to predict active management’s demise. After all, more than 80% of U.S. financial assets managed by investment companies are still in actively managed vehicles, according to ICI data.

Still, the trend is clear, so active managers owe it to their investors to make the case for an active approach. Walter Prahl, Lord Abbett Partner & Director of Quantitative Research, takes up the topic.

Active Management: A Social Rationale
It is worth remembering that in addition to the role active management plays in investment portfolios is the role it plays in a capitalist economy. By investing in companies that appear, based on rigorous analysis, to be superior creators of wealth, active managers help direct capital to those who are most likely to use it most productively. The decisions of hundreds of active managers to buy a security, even in the secondary market, combine in the aggregate to reward companies who are believed to be the most efficient users of capital and, therefore are more likely to earn better returns, said Prahl.

Without the activity of these managers, who make exhaustive efforts to research, value, and implement investment decisions, the allocation of capital would not occur in a rational manner. Capital instead could be allocated on some other basis, such as political connections, with the result that most of the capital would be directed to economically unsuccessful ventures.

Similarly, by investing passively—that is, purchasing all stocks in an index without regard for their economic fundamentals—investors reward companies that are poor capital allocators. The positive effect of index membership on a stock’s price is well-known.1 Passive investments, therefore, contribute to market prices that are less accurate indicators of a company’s true value.

“You can’t have successful allocation of capital if everybody in the market is investing passively,” Prahl said. “In some sense, those who would question the role of active management are denying the capital allocation aspect of the market.”

Why Passive Isn’t Really Passive
It also is worth noting that the term “passive management” is, in fact, misleading. True passive investing is not feasible. As author and consultant Cullen Roche has argued, “At the macro level, there is only one portfolio of all outstanding financial assets. If you were a truly ‘passive’ investor, you would simply buy the total market of financial assets as opposed to trying to pick your own superior portfolio based on assets inside of the aggregate. Of course, that portfolio can’t be purchased because that portfolio product doesn’t exist.”2

In reality, passive investing means picking asset classes. But, like security selection, this is active; it requires developing some thesis about how an asset class is likely to perform and why giving it an allocation of 40%, for example, is better than an allocation of 60%.    

Moreover, says Roche, an investor’s risk tolerance is likely to change over time, and this will require altering the portfolio’s allocation, at least minimally. This is also the decision of an active investor.

“What seems to have happened over time,” says Roche, “is that many people who advocate ‘passive’ indexing seem to have forgotten the most important part of portfolio construction—the actual process and necessary forecasting of the assets you pick to allocate.”3

Markets Are Efficient...
The passive approach to investing has deep roots. About 100 years ago, a French mathematician noticed that stock prices appeared to be unpredictable. In the 1950s and 1960s, economists picked up this idea and proposed that markets were unpredictable because they were “informationally efficient.” That is, market prices changed rapidly to reflect all relevant information, and because news occurs randomly, market prices also vary randomly. This idea came to be known as the Efficient Market Hypothesis (EMH).

EMH assumes investors are reasonably intelligent and rational. And when their actions are aggregated in the market, finding stocks that are mispriced becomes difficult. Investors, therefore, will be unable to consistently beat the market, unless they take on greater risk. From an EMH standpoint, therefore, it appears that paying somebody to outperform the market makes little sense.

Some active managers have embraced an alternative view of the market offered by behavioral finance as a way of justifying their approach to asset management. Behavioral finance considers the role that psychological factors—fear, overconfidence, or pessimism, for example—play in investment decisions. These emotions produce certain biases. And because these biases are widespread, they result in poor investment decisions as well as mispricings.

...Up to a Point
Strictly speaking, EMH doesn’t hold that markets are perfectly efficient, but investors’ views have morphed into that belief over time, according to Justin Fox, author of The Myth of the Rational Market. So, it’s not necessary to embrace behavioral finance in order to justify active management, said Prahl.

More than 30 years ago, two economists demonstrated that market efficiency is always in flux and that some inefficiency will always remain even in the most efficient market.

Sanford Grossman and Nobel laureate Joseph Stiglitz showed that if market prices completely reflected all relevant information, there would be no incentive for investors to make any effort to obtain information and trade on it. But if that were true, then market prices would not reflect that all relevant information.

In other words, if investors believe the market is efficient, they won’t bother to trade on any new information that appears, and so prices won’t reflect that information, meaning the market won’t be efficient.

This idea—known as the Grossman/Stiglitz Paradox—means that markets can never be perfectly efficient and that market efficiency is not a static condition: it fluctuates, depending on the extent of the efforts of active managers.   

So, how much efficiency is possible? Simply put, markets reach the limit of efficiency when the return on an investment no longer covers the cost of the resources expended in active investing. Active investors may travel around the globe to research a company because they anticipate that those efforts will be compensated with a return that will cover those costs and provide a risk-appropriate return on investment. If those efforts are rewarded less and less, that suggests that these markets are becoming more efficient. If enough active investors then pull back as a result, market efficiency is likely to decline, resulting in mispricings that will again entice them back.

So a market’s efficiency is always in flux. And, in fact, the growth of passive investing suggests that market efficiency will decline, resulting in more mispricings that active managers could capitalize on.

There are signs this may be happening in the U.S. market. Bloomberg has reported, for example, that within the S&P 500® Index, the range of valuations of the top 50 companies has become more narrow than at almost any time in the past 25 years. Price-to-earnings ratios diverge from the mean by an average of just 22%, nearly the lowest range since 1990.4

Historically, Diversified Stock Pickers Have Outperformed
How can active managers best capitalize on market inefficiencies? Research by K.J. Martijn Cremers at the School of Management at Yale University and Antti Petajisto, formerly at New York University, has shown that portfolio managers who avoid “index hugging”— have historically had a greater potential to outperform their benchmarks – even after fees are considered. That is, funds whose stock holdings and weightings diverge most significantly from their benchmarks and who, therefore, earn a high score on Active Share have had greater potential to beat their benchmarks.  

Follow-up work by Petajisto, which updated the results through the financial crisis of 2008–09, refined this finding. He noted that among funds that score high on Active Share, it is those that are diversified, that is, hedged against macro risks, that have historically been more likely to outperform, even after fees are considered.

On average, these diversified, high Active Share funds, which Petajisto calls “diversified stock pickers,” beat their benchmarks by 1.39%, after fees, between 1990 and 2009. Other types of active management, including concentrated funds, sector rotators, and other kinds of market timers, failed to outperform, on average, during this period, after fees were taken into account. (See, “Why Stock Picking Keeps on Ticking,” March 3, 2014.)

In our opinion, active management will always be necessary. Without it, capital would not be distributed to its most productive users, and markets would not be as efficient as they are. So, some portion of invested funds will always be actively managed. From an investor’s standpoint, then, the question is: Which active managers add most to market efficiency and, therefore, are more likely to earn higher returns? Research on Active Share shows that it is most likely to be those who are willing to venture away from their benchmarks while remaining adequately diversified.

                                                                                                    -- Reported by Ron Vlieger

 

1 See, for example, Anthony W. Lynch and Richard R. Mendenhall, “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,” Journal of Business 70:3 (1997); Rajesh Chakrabarti, Wei Huang, and Narayanan Jayaraman, and Jinsoo Lee, “Do International Investors’ Demand Curves for Stocks Slope Down Too?" European Financial Management Association, May 2002, available on Social Science Research Network, http://papers.ssrn.com; and Clark L. Maxam, “The Index Effect Revisited,” November 1998, available on Social Science Research Network, http://papers.ssrn.com.
2 Cullen Roche, “The ‘Allocation Matters Most Hypothesis,’” www.pragcap.com, September 6, 2014.
3 Ibid.
4 Lu Wang and Joseph Ciolli, “Identity Crisis in S&P 500 as Range of Valuations Narrows,” www.bloomberg.com, September 2, 2014.

 

RELATED TOPICS

FEATURED STRATEGIST

On the iPad

 

videoDownload our Perspectives app, "Five Factors Favoring Active Management."

RELATED CONTENT

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field