After what investors have experienced over the last 18 months or so, it is natural to look around and determine if the investment philosophy guiding your portfolio is a proper one. It seems institutions, the proverbial 800-lb gorillas, are moving away from active managers.

The Wall Street Journal published a story, Active Managers Get the Cold Shoulder, on Monday indicating that institutions are questioning the benefit (or lack of benefit) of an active management approach to stock selection.

A quote that easily jumps out is: “Active managers have not given us the added performance in a down market that we hoped for.” These funds can hire anyone they desire and they are backing away from the active manager option.

As a quick review, active managers are those that try and find under-valued securities and insist that the stock is mispriced. They will profit from their purchase when market participants eventually come to their senses and provide a higher value to that stock relative to the overall value of the stock market. These active investors also take into consideration macro level events and surmise that the markets have or have not reflected these events properly in their prices and hence take anticipatory market positions.

A passive or structured investment approach takes a completely different position. It is based on the premise that all known information is already reflected in a stock’s price and even though new/unforeseen events may recalibrate the stock’s price significantly (i.e., volatility) an investor cannot take the known information and consistently use it to outperform another investor.

I have pointed out in our blog the performance shortcomings of an active approach relative to a structured investment approach. See entries on Active Manager performance and Hedge Funds.

We embrace this structured/passive approach. And it seems, based on the article, so are institutional investors with increasing frequency.