Heartland Advisors

A New Era for Active Management?

A decade ago, Warren Buffett argued that many investors should stick with low-cost index funds because, he claimed, the system was stacked against active management. In his 2014 Berkshire Hathaway Shareholder Letter, he noted: “There are a few investment managers, of course, who are very good — though in the short run, it’s difficult to determine whether a great record is due to luck or talent.” And most advisors, he said, “are far better at generating high fees than they are at generating high returns.”   

It sure seemed like sage advice from the Oracle of Omaha. Indeed, over the past decade, only a third of actively managed small-cap value funds wound up beating their passive counterparts.

But that’s not the whole picture.

We recently studied the performance of active funds based on their total assets and discovered something interesting. The 10 largest active small-cap value funds, which received a significant portion of assets over the past decade, topped their benchmarks 97% of the time over the past three, five, and 10 years through Dec. 31, 2023. Active mid-cap value funds did nearly as well, with the 10 biggest funds in that category beating their index in 90% of those time periods.  

While Buffett may have been right about many active managers having difficulty beating their benchmarks over time, particularly in large cap growth, his criticism of financial advisors seems off the mark. It turns out, advisors (and their teams) appear to have been more than capable of identifying those active managers who can outperform, as evidenced by the fact that they have been directing client assets to those funds with great success in the small and mid-cap value categories. 

A Bygone Era

To be fair, when Buffett criticized active managers and advisors a decade ago, the investment industry was a far different place. It was the beginning of the end of commission-based brokers, who made a substantial portion of their money buying and selling securities and fund shares. In 2010, commission-based investments made up the vast majority of advisors’ total assets, while fee-based accounts—where the advisor is paid as a percentage of the total assets they manage, not through commissions on trades—represented less than one third, according to Cerulli Associates. 

Commission-based strategies tend to encourage trading activity. Back then, one of the primary skills for success for advisors was the ability to tell a good story with enough “sizzle”, backed by excellent returns, even if just in the short-term, to get the client to act. Such funds were then “pitched” to the client by the broker. In this respect, Buffett was right in 2014 when he noted that for many advisors, “their core competence is salesmanship.”

The Rise of Manager Research 

However, much has changed in the decade since Buffett made those remarks. Today, a majority of assets are comprised of fee-based accounts, thanks in part to the rise of registered investment advisors, who, as fiduciaries, must act in the best interest of their clients. With much of the focus removed from short-term performance and redirected to achievement of financial goals, the manager research profession has been more broadly injected into the industry.  The skills required of those in this role are very different from the successful brokers of the past. Drive, willingness to accept rejection, comfort with approaching people about their investments, and shiny presentation skills seem to have been swapped for academic capacity, intellectual curiosity, problem solving, and a healthy dose of skepticism. 

This has also given rise to an entirely new group of investment professionals who — no longer motivated by transactions and sales — pride themselves on picking through the details, looking past the short-term, and deeply analyzing the less “sellable” components of a fund. Those involved with fund manager research now look for differentiating factors that seem repeatable and explain historical outperformance, even if such details might lack “sizzle”. 

When Buffett wrote his shareholder letter, it was rare for us to run into a manager research professional anywhere but with the bigger firms. Today, we find in-house analysts, whose primary function is manager research and fund selection, at smaller RIAs, trust companies, and advisors within larger firms, with as little as $100 million in assets under management. This explains why there are more than 8,500 professionals with the Certified Investment Management Analyst (CIMA) designation today, up nearly 40% from 2010. 

These professional analysts have already had a meaningful impact, directing fund flows not to the highest-commission funds but aiming at the best-performing managers, which is particularly evident in the part of the market where Heartland operates. 

Of course, the universe of skilled managers changes over time, which is why it’s important to consider those active funds to whom advisors are turning to next, not just those funds that received the bulk of assets in the past. In 2023, based on Morningstar data, the Heartland Mid Cap Value Fund was one of the fastest growing funds in the mid-cap value space, based on a percentage of asset growth. The question investors should ask is does their advisor have manager research capabilities as part of their offering and might it benefit them. 

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Heartland Advisors Value Investing Relationship Manager Michael Kops

Michael Kops

Vice President and Partner


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Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal.

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Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

Active small-cap value and mid-cap value funds were selected based on Morningstar category definitions. 

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